JP Morgan reassured after Tesco's Capital Markets Day, reiterates 'overweight'

Analysts at JP Morgan walked away from Tesco's Capital Markets Day "reassured", telling clients that it should at least suffice to underpin consensus estimates for the grocer's margins and free cash flow.

Nevertheless, while the FTSE 100 resident provided detail on the multiple areas of opportunity, and the presentation overall was "comprehensive and well conducted", but it was not very specific on new targets, JP Morgan said.

Even so, the investment bank opted to keep its estimates and 180.0p target price unchanged while reiterating their 'overweight' recommendation.

JP Morgan also described Tesco's execution as "solid", explaining how given the low likelihood of structural change in the foreseeable future, the investment rationale was one of cost cutting and "sensible" capital allocation which would drive higher free cash flow.

And on a price-to-earnings multiple of roughly 12 and sporting a free cash flow yield of 10%, the shares looked "cheap", JP Morgan said.

"There should be marginal buyers of the stock as we currently see the European and US investor base more out than in the name, with the UK investor base having headroom to increase positions and few other obvious interesting stories within retail at this moment."

Separately, analysts at Deutsche Bank highlighted the company's positive track record "in the past years" when it came to executing on strategy.

Hence, they said: "we see the number of additional cost-saving projects, along with management's confidence on the growth opportunities and ability to improve cash generation as positive."

Deutsche Bank reiterated its 'buy' recommendation for Tesco, while trimming its target price from 295p to 285p, forecasting a 30 basis point improvement in the firm's margins at the earnings before interest and taxes level and further noting how on a 2019 price-to-earnings multiple of 13 the shares were trading at 13% discount to their Europpean peers.