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Tesco hopes for better trading as inflation eases


MongiIG

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After a tough year for the UK consumer, signs of weakening inflation and better wage growth offer hope for improved performance.

TescoSource: Bloomberg
 

 Axel Rudolph FSTA | Senior Financial Analyst, London | Publication date: Tuesday 03 October 2023 13:19

Tesco hopes for better trading as inflation eases

At Tesco’s first quarter (Q1) update in June, the management team's predictions for fiscal year 2024 were unchanged. They predicted a retail operating profit of £2.6 billion, a retail cash flow of £1.4 billion to £1.8 billion, and a profit from Tesco Bank between £130 million and £160 million.

This isn't surprising, considering the rising cost of living and lower increases in food prices can affect the company's earnings. As a result, Tesco's stock has gone down from its high point in May of 285 pence.

However there are some positive trends starting to appear. For example, the increase in food prices has noticeably slowed down. Even though this can limit Tesco's revenue growth, it could be advantageous due to a more important development - the growth of real wages among Tesco customers. Now that wages are increasing faster than inflation, people are finding themselves with more disposable income.

This will help trading, as customers are able to move back towards more expensive products and away from the value ranges. In addition, they may look to increase spending on non-essential items.

According to the latest grocery reports from Kantar, Tesco has shown more sales growth than its traditional competitors. The company's sales grew by 9.5% and 9.1% in August and September respectively. Meanwhile, cheaper retailers Aldi and Lidl have seen their sales growth slow down (although still higher than Tesco), with a decline to 16.6% in September from 20.5% in August.

How to trade Tesco’s first half results

Tesco, the United Kingdom-based multinational groceries and general merchandise retailer, is set to release its first half (H1) 2023 results on 4 October 2023.

Tesco analystsSource: Refinitiv

Refinitiv data shows a consensus analyst rating of ‘buy’ for Tesco – 3 strong buy, 7 buy and 4 hold - with the median of estimates suggesting a long-term price target of 310.00 pence for the share, roughly 19% higher than the current price (as of 3 October 2023).

IG Tesco sentimentSource: IG

IG sentiment data shows that 95% of clients with open positions on the share (as of 3 October 2023) expect the price to rise over the near term, while 5% of clients expect the price to fall whereas trading activity over this week and month shows 61% of buys. Note that the week and month have only just begun, though, and that therefore this data needs to be taken with a pinch of salt.

Tesco technical outlook

The Tesco share price has greatly outperformed the FTSE 100 by rising around 14% year-to-date.

For further upside to be on the cards the September peak at 274.8p will need to be exceeded, something which might prove to be difficult following last week’s sell-off.

Tesco Weekly Chart

Tesco Weekly chartSource: TradingView

From a medium-term perspective, as long as the Tesco share price stays above its February-to-August lows and the 200-week simple moving average (SMA) at 246.4p to 240.40p on a weekly chart closing basis, the 2022-to-2023 uptrend remains intact.

Tesco Daily Chart

Tesco Daily chartSource: TradingView

The 4% drop in the Tesco share price from its 274.8p September high has taken it to the 55-day simple moving average (SMA) at 259.5p, close to the 200-day SMA at 256.3p which may also offer support.

While the next lower September low at 254.1p holds, the recent Tesco share price decline can be viewed as nothing more than a correction of the August-to-September advance.

Were the 254.1p low to be slipped through, though, the technical picture would become more bearish and put the key support zone between 246.4p and 240.40p on the map.

For the bulls to become more optimistic a rise and daily chart close above Monday’s high at 267.8p would need to unfold. Only then could the September peak at 274.8p be back in focus.

If overcome, the 2022-to-2023 downtrend line at 279p would be back in sight.

 

 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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