It's been a good week for Tesco PLC (LON:TSCO) shareholders, because the company has just released its latest interim results, and the shares gained 4.6% to UK£2.20. Revenues came in 7.1% below expectations, at UK£29b. Statutory earnings per share were relatively better off, with a per-share profit of UK£0.095 being roughly in line with analyst estimates. Earnings are an important time for investors, as they can track a company's performance, look at what the analysts are forecasting for next year, and see if there's been a change in sentiment towards the company. We thought readers would find it interesting to see the analysts latest (statutory) post-earnings forecasts for next year.
After the latest results, the consensus from Tesco's 14 analysts is for revenues of UK£58.2b in 2021, which would reflect a definite 10% decline in sales compared to the last year of performance. Per-share earnings are expected to bounce 22% to UK£0.13. In the lead-up to this report, the analysts had been modelling revenues of UK£59.8b and earnings per share (EPS) of UK£0.12 in 2021. If anything, the analysts look to have become slightly more optimistic overall; while they decreased their revenue forecasts, EPS predictions increased and ultimately earnings are more important.
There's been no real change to the average price target of UK£2.77, with the lower revenue and higher earnings forecasts not expected to meaningfully impact the company's valuation over a longer timeframe. That's not the only conclusion we can draw from this data however, as some investors also like to consider the spread in estimates when evaluating analyst price targets. There are some variant perceptions on Tesco, with the most bullish analyst valuing it at UK£3.15 and the most bearish at UK£2.20 per share. Analysts definitely have varying views on the business, but the spread of estimates is not wide enough in our view to suggest that extreme outcomes could await Tesco shareholders.
Of course, another way to look at these forecasts is to place them into context against the industry itself. These estimates imply that sales are expected to slow, with a forecast revenue decline of 10%, a significant reduction from annual growth of 4.2% over the last five years. By contrast, our data suggests that other companies (with analyst coverage) in the same industry are forecast to see their revenue grow 2.8% annually for the foreseeable future. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Tesco is expected to lag the wider industry.
The Bottom Line
The most important thing here is that the analysts upgraded their earnings per share estimates, suggesting that there has been a clear increase in optimism towards Tesco following these results. Unfortunately, they also downgraded their revenue estimates, and our data indicates revenues are expected to perform worse than the wider industry. Even so, earnings per share are more important to the intrinsic value of the business. Still, earnings are more important to the intrinsic value of the business. The consensus price target held steady at UK£2.77, with the latest estimates not enough to have an impact on their price targets.
Keeping that in mind, we still think that the longer term trajectory of the business is much more important for investors to consider. We have forecasts for Tesco going out to 2025, and you can see them free on our platform here.
And what about risks? Every company has them, and we've spotted 3 warning signs for Tesco (of which 1 is significant!) you should know about.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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