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Home / Blog / blog / Trader’s Corner || Stocking Shelves Takes its Toll, Emergency Firm’s Powerful Surge || 9-4-20

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Trader’s Corner || Stocking Shelves Takes its Toll, Emergency Firm’s Powerful Surge || 9-4-20

Supermarket giant Tesco saw a share price slump of four per cent after its results revealed that the coronavirus situation has taken its toll on costs.

In its full year results, Tesco showed underlying profits of £1.32 billion for the past year, along with a 30 per cent sales surge over the last few weeks, but it warned that ‘feeding the nation’ could cost up to £925m in higher distribution costs.

The news, along with the supermarket chain’s decision to raise its final dividend pay-out from 4.10p to 6.5p per share has led many analysts to downgrade its rating. Shore Capital downgraded the supermarket from ‘buy’ to ‘hold’ as well as reducing expectations for group profits and earnings per share.

So, is Tesco a bargain buy at the current price of 225.60p or should investors leave the stock on the shelves for now?

The decision to up dividends has received mixed reactions from analysts although Tesco boss defended it saying: ‘We would not be paying a dividend if we felt it would jeopardize the business in any way”

Joe Healey from the Share Centre described it as ‘a somewhat aggressive move’ and he pointed out that similar companies such as Morrisons had ‘deferred dividends to preserve cash.’

Michael Hewson from CMC Markets disagreed though saying: ‘I see no problem with the dividend – the business is in a good place, and they are looking after their employees as well.’

Others think that despite the dividend decision, the shares are undervalued, pointing to the supermarket’s price-to-earnings ratio of 13.4, the potential for growth through its expansion into wholesale and the imminent arrival of new CEO Ken Murphy.

Luxury car brand Rolls Royce’s share price has sped up the stock market, surging fifteen per cent after it revealed it had secured a £1.5 bn revolving credit facility.

The measure was announced as part of its defensive strategy against the current crisis along with scrapping its dividend payment and reducing salaries by at least ten per cent.

Last week, it was also revealed that the carmaker and aerospace engineer would be providing the NHS with much-needed ventilators.

However not everyone is convinced that things are on the up for Rolls Royce despite the cost cutting and credit availability. The Share Centre retained its ‘hold’ rating on the stock with analyst Ian Forrest saying: “Before the coronavirus outbreak there were signs of improvement thanks to the efforts of chief executive Warren East, but with the current grounding of so many commercial jets, for what may be an extended period, the short-term outlook remains difficult so the shares are no better than a “hold”

Hargreaves Lansdowne however offered an opposing view saying they believe “the long-term attractions of the business are still intact”, pointing to the firm’s substantial liquidity and a hefty order book ‘boosted by defence contracts.’

Appliance repair firm Homeserve is standing strong through the current pandemic, with an 11 per cent share price surge after it reported better than expected end-of year profits.

The emergency call-out specialist says it expects pre-tax profits to jump more than 12 per cent to £181m for the year and its share price has jumped to 1,148p at the time of writing.

Homeserve also announced it does not expect to furlough any of its employees, with 6000 office-based workers working from home and its emergency team responding to 150 callouts per hour.

The repair and callout firm is showing all the signs of resilience through the current crisis – boilers and plumbing will always need fixing even in lockdown. The company was thriving even before the pandemic though – it was making headway into North America where its client base had grown by ten per cent in a year and its overall customer numbers are rising by 100,000 year on year as of March.

Some have pointed out that Homeserve looks expensive with a price to earnings ratio of 26.1 times at current prices, but with its current growth rate that does not necessarily seem unjustified.

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

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