Deutsche upgrades Tesco, downgrades Sainsbury
Tesco got a boost on Thursday as Deutsche Bank upgraded the stock to ‘buy’ from ‘hold’ and lifted the price target to 240p from 230p.
Food & Drug Retailers
4,548.70
17:14 04/10/24
FTSE 100
8,280.63
16:49 04/10/24
FTSE 350
4,570.17
17:14 04/10/24
FTSE All-Share
4,527.24
16:54 04/10/24
Sainsbury (J)
291.00p
17:15 04/10/24
Tesco
362.20p
16:55 04/10/24
The bank said that while it remains concerned about volume growth, Tesco’s shares have underperformed around 5% over the past month and the risk/reward skew is now sufficiently attractive for a buy rating.
Deutsche said its buy case rests largely on a belief that the UK business can improve profitability from its current levels, even on stable volumes.
“We have outlined the reasoning behind this a number of times but it reflects benchmarking versus historic profitability and versus peer profitability and takes into account group scale, store level sales and differences in store ownership.”
DB reckons Tesco can deliver a small beat at its full year results on 12 April.
“Within this, we think the UK margin progress will be better than expected, lending credibility to the margin recovery story. We also expect a miss from the international business but we believe investors will value progress on UK profitability more highly.”
In the same note, Deutsche cut its stance on Sainsbury to ‘hold’ from ‘buy’ and lifted the price target to 300p from 280p, given a strong performance over the last quarter and reduced upside to the bank’s target price.
DB noted that its upgrade to buy had been premised on having a more favourable view of the Argos deal than the market and believing that the share was attractively valued relative to peers and was essentially pricing in a material margin reset, which we it not think would happen.
It said the fourth quarter trading update was a slight miss on the grocery like-for=like side, but the Argos LFL was a strong beat.
“We continue to believe the Argos acquisition was both financially and strategically attractive. Of all the structural challenges facing UK food retailers, we think property costs are the greatest. Footfall is a valuable and increasingly scarce commodity. We think the Argos business helps Sainsbury’s protect and enhance the footfall to its stores.”
At 0935 GMT, Tesco shares were up 1.2% to 188.02p, while Sainsbury’s was down 1% to 263.88p.