Tesco slumps as JPMorgan highlights issues

Having analysed Tesco’s profit and loss, cash and balance sheet trends, JPM concluded: “Tesco’s ability to generate cash flow in the foreseeable future could be more constrained than we thought before the results; the results were of lower quality than seemed at first glance; upcoming news flow will likely remain negative.”

The bank argued that some of the tailwinds that supported earnings before interest and taxes in 2015/16 – such as GM expansion, shrinking fuel within the mix and declining operating leases – were unlikely to recur to the same extent.

In addition, it said that while Tesco’s progress reducing indebtedness was impressive, the balance sheet remained stretch.

“This remains a concern in the context of Tesco’s thin margins and the more marked structural and cyclical headwinds within its core UK market.”

JPMorgan expects to see a sequential slowdown in Tesco’s current sales run rate, weighed by its own price investments, in the context of increased competition.

JPM cut its adjusted earnings per share estimate for full year 2017 to 7.71p from 9.49p and 2018 estimate to 11.10p from 12.36p.

The bank maintained its ‘underweight’ rating and 150p price target on the stock.

At 1353 BST, Tesco shares were down 4.1% to 175.99p, making it the biggest loser on the FTSE 100.