Tesco who is buying and who is crying

Thrugelmir

Minrich wrote: »

The company will still make about £2-2.3 billion this financial year so it must still be pretty good Company ?

Will Tescos make this profit though? Falling sales and margins set against a fixed cost base. Rumours of a rights issue as well.

Glen_Clark

Minrich wrote: »

The company will still make about £2-2.3 billion this financial year

I hope you are right, but if the shareholders believed those profits were sustainable the shares would still be over £4

bowlhead99

Minrich wrote: »

, i have about £30k i had set aside to buy at £2 but i really am not very confident that they won't drop further . The company will still make about £2-2.3 billion this financial year so it must still be pretty good Company ?

Well:

They haven't said how much they now think they will make for the financial year; they have said it depends on how well the market conditions go, how quickly their improvement initiatives take effect, if at all, and specifically they are still working to establish what effect the £250m issue would have when applied to the full year. So, £2 - 2.3bn may be optimistic for this year, we just don't know.

Secondly, there are tonnes of companies globally that make £2bn in a year. Some of them are great companies and some are not so great companies with failing business models in changing industries. Just making that headline amount of money doesn't tell you whether they are good or not. Importantly for an investor, it is not just about whether they are any good, but whether the price at which they are available is fair for how good they are. Apple will do over £2bn profit next year I'm sure but it doesn't mean their price isn't currently twice as much as what they're 'worth' to an investor in the long term.

So for Tesco, whether the profits are £2bn or a bit more or less at the moment, what will they be next year and all the years off into the future, and is £15-£16bn a fair price to pay for that as the company's market capitalisation. That is a difficult question although we all have our view. The market's view, made of millions of international participants, is currently that 180p is about right. Later in the month when the accounts come out, the view may change.

Personally I think the idea of putting £30k into Tesco shares when your joint gross income (as you were telling us on a different thread last month) is under £30k, is a very bold move. You would have to have very high confidence that the 180-200p is a fair price and not going to turn out to have been overpriced.

If you don't have compelling reasons for why Tesco is the company for you, out of 2000 UK listed companies and 20000 global listed companies and a myriad of diversified fund and investment trust options which all have the potential to produce great returns over the next 50 years or so... then you should not put your entire year's gross income into this one company, even if you are sitting on a bit of a cash pile looking for opportunities.

I think you have been sensible to hold fire on that decision even though your 'target' of two quid was reached. This is not to say the shares couldn't double in value over the next few years but just a general comment that it's very high risk to put a high proportion of your net worth into any opportunity.

Thrugelmir

Glen_Clark wrote: »

I hope you are right, but if the shareholders believed those profits were sustainable the shares would still be over £4

The 52 week high is only 372p. So why would investors pay 400p for a Company that's in a profit decline?

The whole food retail sector will undergo a significant rerating over the next couple of years. As the battle has only just started.

Minrich

bowlhead99 wrote: »

Well:

Personally I think the idea of putting £30k into Tesco shares when your joint gross income (as you were telling us on a different thread last month) is under £30k, is a very bold move. You would have to have very high confidence that the 180-200p is a fair price and not going to turn out to have been overpriced.

I think you have been sensible to hold fire on that decision even though your 'target' of two quid was reached. This is not to say the shares couldn't double in value over the next few years but just a general comment that it's very high risk to put a high proportion of your net worth into any opportunity.

Well we do have another £200k elsewhere , our income is virtually fixed forever and also index linked
I just think that when it comes to selling food every person needs to use the businesses who sell it , those businesses are getting fewer and fewer , who will dominate ? I think Tesco will when you see the smaller stores cropping up everywhere and taking over all sorts of old building like pubs and banks etc . I hope i am right but if the business collapsed and shares were worthless i would really only be about £60k down and still have the £200k in safe places , but earning a paltry sum . Thats never going to happen is it ? The Tesco punt on todays price would give a return (if divi stays the same and we know they have cut it already) at 8.5% ish .

bowlhead99

Minrich wrote: »

The Tesco punt on todays price would give a return (if divi stays the same and we know they have cut it already) at 8.5% ish .

That is pretty much the most ridiculous premise for investing ever. "Hey, you know what, if this business with declining profits and cash flows which can no longer afford to pay £x per year as dividends, *could* afford to pay £x a year as dividends, then the fictional dividends that it can't pay would represent 8.5% of its share price! Isn't that a great return! Sounds like it's worth a punt!"

From what you wrote, you could afford to lose the £60k and still have £200k and your ongoing index linked pension is enough to live on. So your exposure is 'only' 23% of your £260k liquid assets. In one company, which you describe as a punt. If you go ahead with the second £30k investment, good luck to you - you certainly have bigger balls than most. Others might respectfully suggest you buy some books on portfolio construction, risk management etc etc.

Thrugelmir

Minrich wrote: »

I just think that when it comes to selling food every person needs to use the businesses who sell it , those businesses are getting fewer and fewer , who will dominate ?

Perhaps no one. Tesco's has the most to lose though. With a turnover of £60 billion. A 1% fall in operating margin knocks £600 million off the bottom line.

Glen_Clark

Thrugelmir wrote: »

So why would investors pay 400p for a Company that's in a profit decline?
.

Why indeed
I said if they believed £2 - £2.3bn profit was sustainable...

Minrich

Warren Buffet has supposedly sold 245m Tesco shares , where has he sold them and who did he sell to ? They haven't shown up in the recent trades on LSE ??
Why would you sell them when they are at their lowest price for many years ? or does he think they will go lower ? If so why has he only sold some of them ?

Also there are 8.1billion Tesco shares and he has reduced his holding to 3% having held 3.97% , well my maths tells me that his 4% total was only 324m , so how come he still holds 3% when he has sold 245m ?

or are my figures flawed ?

Scarpacci

The shares were sold last Friday, I read, and since we're finding out about it today, must have been done in a manner which didn't draw attention to the sale. A stake the size of Berkshire Hathaway's could very easily move the market when it starts to sell down, so they'll have been careful about trying to do it in a way that doesn't noticeably drag the share price down further (and ensure they get even less for their shares).

What the strategy of selling at these lows is, it's hard to tell. I think it's plausible he's chosen to head for the exit and, given the size of the stake, needs to sell in tranches. It may not be that they expect the shares to go lower, dramatically at least, but don't expect any sudden improvement in the share price or the business either. That he's not buying at the lows would suggest they lack the belief in a quick turnaround or, at the very least, do not want to risk increasing their exposure to TSCO. They clearly want less exposure to Tesco.

The markets are down a lot recently so there is the possibility, to put the most favourable spin on it, that Buffett is selling Tesco because there's simply better opportunities elsewhere. I would well believe there are better opportunities, although it's questionable with all the cash BH has sitting around that they would choose to sell a loser at a significant loss just to move into a different stock.