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Should you buy Tesco shares?

David Stevenson examines Tesco's latest management statement and asks: should you buy Tesco shares?

For an update following its Christmas 2011 profit warning, get our latest view on Tesco here.

Tesco's (TSCO)third-quarter management statement has just been published. Group sales (including VAT and petrol) for the 13 weeks to 26 November 2011 were 7.2% up on the year before, with international revenues 8.2% higher.

But in the UK, like-for-like sales - which exclude revenues from new store openings, VAT and petrol - dropped by 0.9% over those 13 weeks compared with last year.

"We have made good progress in our third quarter against the background of challenging conditions for consumers in many of our markets", says boss Philip Clarke. "Overall, our UK business continues to grow faster than the industry".

How's the outlook?

The company is keeping its cards quite close to its chest. "We are performing broadly in line with market expectations", says Clarke. "And the outlook for the year as a whole remains unchanged, ahead of the important seasonal trading period".

But Britain still contributes around two-thirds of the firm's turnover. As Tesco notes, "UK consumers remain under pressure from rising unemployment, falling real wages" ie prices still rising faster than pay packets "and increasing living costs".

In addition the government is curbing its spending further, and Europe ison the brink of another recession. So there's unlikely to be much cheer on the profits front in the immediate future.

11-12-09-Tesco-2

What the analysts are saying

Of the 40 analysts surveyed by Bloomberg, 72% say 'buy', 18% see Tesco as a hold and 10% are sellers. The average price target is 17% above the current level.

Our view

In current markets, all shares are likely to be volatile. But having undershot the market by more than 10% in the last two years, Tesco now looks good long-term value on a forecast p/e for next year of just ten. The near-4% prospective yield also appeals.

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