HSBC ups Tesco to 'buy', says recovery has gathered pace

HSBC upgraded Tesco to ‘buy’ from ‘hold’ and lifted the price target to 260p from 195p, saying the recovery has gained pace, with sales and market share up.

When the bank downgraded the stock back in July, it was due to worries that ASDA might undertake a major price repositioning. While it still expects ASDA to get more aggressive on price, it pointed out that the pace of the Tesco recovery is increasing, meaning it is better able to cope with whatever ASDA throws at it.

“Volumes, cash sales and market share are all improving. At the same time, the company is keeping a tight control on costs to ensure the high contribution margin of extra sales falls through to the bottom line, allowing further investment in price. This momentum gives Tesco firepower to defend against ASDA or to fund its own pricing initiatives.”

HSBC expects Tesco to be highly cash generative by 2020, with a UK operating margin of around 4%.

“At this point, we expect the industry will be back to equilibrium, with Tesco having proved the long-term winner.”

At 0923 GMT, Tesco shares were up 3.3% to 204.90p.