Thursday newspaper share tips: Tesco, WH Smith

Management at Tesco is optimistic and it may be right, the Financial Times’s Lex column said.

Sales are unlikely to grow, after all the rate of improvement is limited by that of the rest of the economy and the UK has too many supermarkets to boot.

Its international footprint is also too small to make a difference and a huge share buyback at a time when the sector is in the midst of a transition would be “insanely risky”, the tipster said.

Therefore, the share price performance is left hinging on one variable – margins.

Good news was to be had on that front in the grocer’s latest full-year numbers; on an operating basis margins edged higher from 1.9% to 2.0%, although that continue to be far less than the 5.0% on show a few years ago.

Furthermore, Tesco is shrinking its footprint and cash flow is surging, according to Lex.

Sellside analysts are forecasting operating profits to rise quickly, from £1.0bn to £1.5bn in two years’ time, which might justify the current lofty earnings per share multiple of 22.0.

While it remains to be seen if sales can be maintained while the number of stores falls and it remains to be seen how Aldi and Lidl will respond to Tesco’s own price cuts, the company has shown that “progress is possible,” Lex said.

Flat like-for-like sales for a six-month stretch which includes Christmas might not seem like much to write home about for most retailers, but WH Smith is different, The Times’s Tempus said.

Its High Street stores are well run for cash and the travel shops it operates at stations, airports and internationally are still seeing business expand at a strong clip – like-for-likes at the latter increased 5.0% in the first half.

Growth in Travel might slow in the back half of the year but analysts are in a cheery mood, with talk of £100m in sales already making the rounds as the unit continues to expand.

Some of those same analysts have also wondered aloud about the possibility of a demerger of the High Street and Travel operations; yet that is unlikely given that the former can help fund the latter and already pays hefty returns to shareholders.

Since 2007 the company has handed back £737m to shareholders.

The downside risk for the shares paradoxically comes the fact that they have had such a strong run so far, pushing their valuation up to 18 times earnings.

“Anyone in for a while might consider taking profits, though I reckon the story has further to run. Take profits, Tempus says.