Tesco boosted as Barclays reiterates positive stance

Tesco racked up healthy gains on Wednesday as Barclays reiterated its ‘overweight’ stance on the stock, saying a price of around 150p is very attractive, ahead of what it expects to be a reassuring first-quarter trading statement next week.

The bank noted Tesco’s share price has dropped over 25% from its peak in late March versus a 2% decline for the FTSE 100.

“Some of the weakness is understandable considering, for example, the limited earnings visibility provided by the company at April's FY results. However, some of the other causes of weakness strike us as exaggerated, such as the threats from ASDA and Amazon Fresh, both of which were highly anticipated and neither of which is necessarily imminent or direct.”

In addition, Barclays said it continues to believe the parameters of the company's long-term incentive plan suggests the it has a much clearer view of the medium-term profit upside than it does for the current year.

“Accepting that current market weakness has exaggerated Tesco's share price fall and has made many stocks look cheaper, we see c150p as very attractive ahead of a likely reassuring trading statement.”

Barclays, which maintained its 215p price target on the stock, expects that for the first time in at least five years, Tesco will report two quarters of positive UK LFL sales growth, with +0.2% to follow the +0.9% seen in the fourth quarter.

“We think that LFL volume growth will have been maintained at around the 3% level seen in 4Q, suggesting good underlying momentum. Internationally we expect Tesco’s Eastern European and Asian regions to have remained comfortably in positive LFL sales territory.”

As far as the UK referendum is concerned, Barclays said a vote to remain would have no significant implications for Tesco or its UK peers. Meanwhile, a vote to leave would likely hit sterling’s value against other currencies, although the extent of the possible impact and timeframe are far from clear.

“In general, a weaker sterling would tend to boost food inflation – typically helpful for sentiment on the sector. In Tesco’s case, a weaker sterling should also boost the value of its international earnings and assets in sterling.”

At 1210 BST, Tesco shares were up 2.5% to 151.05p.