This is no buying opportunity – Tesco goes from bad to worse

Tesco’s share price has slumped, after profits were overstated by £250m. But don’t be tempted to buy, says Phil Oakley. The price has a lot further to fall yet.

140922-tesco

Just when you think that things couldn't get any worse for Tesco(LSE:TSCO) investors, they have. The company has announced this morning that it has inflated its latest half-year profits to the tune of £250m.

In a nutshell it has booked income before it should have done, and has delayed recognising costs until a future period. This is pure number massaging at its best. Unsurprisingly, its share price is tanking.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

So not only does Tesco have a problem with its sales, profits and return on its assets, the whole integrity of its profits is now being called into question. An investigation has been launched, but this smacks of the acts of desperate company accountants under pressure to mask the real extent of the mess that Tesco is in. It now seems that they have gone too far.

I wrote about Tesco a couple of weeks ago in MoneyWeek magazine and argued that the shares weren't really that cheap. I said I wouldn't be interested in buying until they fell to at least 150p. I stand by that figure.

Advertisement
Advertisement - Article continues below

But this morning's revelations suggest Tesco is in deep trouble, with a highly questionable company culture that smells very bad indeed. Tesco will not go bust - but it is like a big ship that has been holed and is still taking on water.

I've been banging on from time to time about how Tesco's finances are not as strong at they seem. It has lots of off-balance sheet debt and has milked its suppliers as a source of cash flow by squeezing their payment terms. This game is well and truly over.

It would not surprise me one bit if Tesco is forced to ask it shareholders for more cash to shore itself up and to buy itself some time to turn itself around. The dividend has been slashed but we can't rule out a rights issue.

These shares are nowhere near the bottom yet. Buying now may be a mistake. There will be a better entry point in the future.

Advertisement

Recommended

Visit/investments/stocks-and-shares/share-tips/600641/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Visit/519913/share-tips-8-stocks-for-robust-returns
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019
Visit/519724/share-tips-of-the-week-166
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 Dec 2019
Visit/519447/tesco-should-keep-its-asian-assets
Stockmarkets

Tesco should keep its Asian assets

The £7bn that Tesco could get for its Tesco Lotus business in Asia looks enticing. But holding on to it would be smarter, says Matthew Lynn.
15 Dec 2019

Most Popular

Visit/investments/property/601110/house-prices-and-covid-19
Property

House prices and Covid-19

The housing market is in deep freeze – what happens when it thaws out?
5 Apr 2020
Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020
Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/economy/global-economy/601106/the-moneyweek-podcast-russell-napier-how-much-debt-is-too-much
Global Economy

The MoneyWeek Podcast – Russell Napier: how much debt is too much?

Merryn talks to financial strategist and author Russell Napier about the huge levels of debt embedded in the global economy, the governmental response…
3 Apr 2020