THE market carnage of the past five weeks has understandably led investors to seek out bargains. Surely, the thinking goes, some excellent blue chips must have been unfairly dragged down by the general selling malaise? Some, no doubt. But not all. Take Tesco. As the chart shows, the share price is actually up since May 10, the day on which the overall market started its precipitate slide.
Tesco’s share price resilience is largely borne out by yesterday’s first-quarter trading statement. Tesco remains a formidable selling machine.
In the UK, the slight sales growth weakness reported for January has proved to be a temporary wobble. Like-for-like growth, which had slowed to 4 per cent has accelerated to 4.5 per cent in the 13 weeks to May 27. Overseas too, total sales growth has picked up and is now running at 15.1 per cent. The largest programme of store openings this year should keep the momentum going.
Andrew Higginson, Tesco’s finance director, was yesterday relatively cautious about the outlook, emphasising that higher utility bills and fuel costs are likely to dampen household spending in Britain. The frenzy of World Cup-related spending on TVs and beer should give a helpful boost in the second quarter, but is irrelevant to longer-sighted investors.
Tesco is firmly entrenched in the sweet spot of the retailing virtuous circle — using sales growth to exploit scale economies and squeeze ever better buying terms from suppliers, which in turn leads to more sales growth.
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At some point it will go wrong, of course. Sainsbury’s, circa 1990, looked similarly inviolate. Eventually, complacency, arrogance, regulation or plain bad luck topple every market leader. But there is no reason to think Tesco is close to that point. Nervous investors can take comfort from the fact that the two best share-pickers on each side of the Atlantic — Warren Buffett and Anthony Bolton — have both been buyers of Tesco stock.
After yesterday’s 2½p share price fall to 327¼p, Tesco stands on a prospective price/earnings multiple of 14.9 and yields 2.9 per cent. Given its entrenched market position and more exciting overseas growth prospects, that looks better value than either of its two main quoted rivals Sainsbury and Wm Morrison.
Even without the benefit of a market-related fall, the shares are a buy.
Expro
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A LOT of confidence is needed for those companies wanting to tap the equity markets for fresh capital at the moment. After all, stockbrokers are pulling their new flotations faster than the FTSE 100 is dropping amid fears that the commodities-led boom is drawing to a rapid end. Expro International Group, a contractor to the oil and gas sectors, has seen its shares drop 10 per cent this month. So its announcement yesterday of a fully underwritten £127.6 million rights issue was either a very bold move, or one of measured confidence.
The latter may well be the case. The five-for-fourteen rights issue is priced at 500p, a 30 per cent discount to Expro’s Tuesday closing price of 714½p. Expro’s shares proved their resilience yesterday, dropping only to 636p. Top of investors’ minds should not have been the pending share capital dilution (the rights issue will mean Expro’s capital is enlarged by about 36 per cent) but what the new funds will be used for. Expro is buying Power Well Services, a Texas-based business, for £365 million. The rights issue will part-fund the deal, with Expro also drawing on new bank facilities and issuing stock to PWS’s private equity vendors.
PWS is a provider of well-testing products and services for oil and gas companies. Parts of its business were acquired from Halliburton two years ago. Expro believes that the addition of PWS will create a business similar in size to Schlumberger, the industry leader.
Consolidation among oil and gas companies has put pressure on the contractors to scale-up, so yesterday’s Expro move is sensible. The global increase in oil and gas consumption spells only good news for Expro.
Expro claims that PWS will be earnings-accretive in its first full-year, which should aid Expro’s progressive dividend policy. In 2005-06, pre-tax profits rose 169 per cent to £29.6 million. This year’s underlying profit growth is likely to be more modest, although PWS’s addition will substantially enhance Expro’s overall bottom line. Despite the fact that Expro’s rights issue shares will not be eligible for 2005-06 dividends, they should be taken up.
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Woolworths
AS SEEMINGLY inevitable as a disappointing England display, Woolworths has become one of the first retailers to blame its poor trading on the World Cup. High streets were deserted last Saturday as England kicked off and Trevor Bish-Jones, chief executive, does not see it getting better as the competition continues.
To be fair, Woolworths makes most of its profits in the six-week run up to Christmas, but this first-half performance — with like-for-like sales down 6.7 per cent in the first seven weeks — is particularly horrible. The question is whether management initiatives to revamp stores and sort out stock problems will come good. Introducing catalogues and using the internet to sell higher-value items has had a positive impact on outdoor living and toys, but the real test is Christmas.
The statement prompted fresh questions over the security of the generous dividend, as the retailer struggles to boost margins, but Woolies throws off a lot of cash and understands the importance of its 5 per cent yield to investors. The shares are worth holding.