Tesco's recent tale of woe continued last week as it reported half year profits had slumped by nearly a quarter, with falling sales in every country in which it operates.
But investors seem to have got used to the bad news, and the supermarket group's shares were virtually unchanged on the week, with one broker even raising its recommendation.
Overall profits fell 24.5% to £1.38bn and second quarter like-for-like sales in the UK were flat, compared to a 2% rise reported by rival J Sainsbury, up 1.1p to 389.8p on Friday. Tesco's European performance was particularly poor, with profits down 70%. And after its failure in the US - it is selling its Fresh & Easy chain to billionaire Ron Burkle - it has put its Chinese stores into a joint venture.
But after falling as low as 342p following Wednesday's results announcement, Tesco's shares ended the week at 361.5p, down 3.5p on the day and just 0.5p on the week.
It was Citigroup which upgraded, moving from sell to neutral and lifting its price target from 285p to 350p. Analyst Alastair Johnston said much of Tesco's troubles was now priced into the shares:
Tesco's operating data remains grim. We do not expect any medium-term pick up. The big change is that these facts seem well established. Most investors are fully cognizant of the operational challenges facing the group we think.
Both Credit Suisse and Macquarie kept their outperform ratings, although Credit Suisse clipped its price target from 430p to 420p. It said:
For a diverse company like Tesco, all rarely goes well at the same time. But surprises such as the scale of the Europe first half miss need to be eradicated. Also, we think it unlikely the shares outperform materially until earnings downgrades end. We cannot be sure of either yet, and there is no obvious imminent catalyst to suggest a share price rally. But we think Tesco is doing the right things in key areas to secure sustained improvement, and this direction of travel is more important to us than even a big one division miss. And the shares are low-rated, on just 10.6 times 2014 PE compared to the sector on 13.3 times so, in our view, have a way to rally before longer-term debates about growth and returns become share price drivers.
Meanwhile Macquarie said:
The UK is clearly on the mend with stable profitability. Asia can bounce back in the second half with Korean restrictions having annualised. Finally, Europe now is an immaterial 5% of the group profit which could potentially recover. With improving cash generation, better focus on returns and a secure dividend, we believe Tesco is attractively valued at these levels.
Overall, the US government shutdown and the approaching deadline of 17 October to raise its debt ceiling dominated sentiment during the week and sent markets lower. But with investors hoping that a compromise would be reached between the Democrats and Republicans over the current budget impasse, the declines were relatively muted. One of the main US economic indicators, the monthly non-farm payroll figures, was due out on Friday but fell victim to the government shutdown.
Meanwhile there were some positive developments in the eurozone, with a threatened collapse of the Italian government averted when former prime minister Silvio Berlusconi, contrary to earlier threats, decided to back the coalition in a confidence vote.
So the FTSE 100 finished up 4.84 points on Friday at 6453.88. Over the week the index lost almost 60 points. Michael Hewson, senior market analyst at CMC Markets, said:
Markets are still in wait and see mode in the absence of today's scheduled US employment report with little in the way of meaningful trading volumes going through, as traders chose to start their weekends early. In essence it's been a case of "no payrolls, no interest" as markets end the week on a broadly positive note.
Standard Life was the biggest riser in the FTSE 100 on the day, up 8.7p to 354.1p after a positive note from JP Morgan Cazenove. The bank put an overweight rating on the insurer's shares, forecasting a possible £300m special dividend to shareholders later this year:
We think it will continue to benefit from 1) UK operational leverage, 2) growth potential in Standard Life Investments (SLI) and 3) a secure dividend. We estimate that earnings at the new style UK business will treble to £262m by 2015, driven by vertical integration and operational leverage (i.e. increasing revenues and fixed cost base). SLI growth remains attractive given positive GARS [Global Absolute Return Strategies] fund flows, and increasing recognition for non-GARS funds like MyFolio....There is £0.8bn of excess capital at the holding company and £0.3bn at Canadian operations which in our view provide strong support for future dividends. We now forecast a special dividend of £0.3bn in 2013 which we believe is well covered from holding company cash and further dividend from Canada in the second half of 2013.
Barclays slipped 1.65p to 271.35p after it announced a 95% takeup for its £5.8bn rights issue. The remaining shares were sold in the market at 268p each to raise £463m. Analyst Ian Gordon at Investec raised his recommendation from add to buy and said:
Although we continue to regard the imposition of a June 2014 deadline to meet a new and contrived 3% adjusted leverage target as unjustified, the rights issue it triggered appears to have been a reasonably successful exercise in damage limitation.
In terms of what will transform Barclays into a bank delivering acceptable and sustainable returns on equity, our view is simple. In contrast to government shutdowns (which we see as a profoundly good idea, the only problem being their apparently partial/temporary nature) Barclays needs much less radical surgery. The rights prospectus stated that it "is on track to meet the £18.5bn cost target...for 2013". Not good enough! It can, should and, we believe, will do better. Weak FICC [fixed income currencies and commodities] trading revenues should be matched/offset by major reductions in variable compensation, while recent rand/US dollar depreciation offers further assistance on sterling costs.
Barclays' shares have shown relative resilience over the past two months in the aftermath of its 30 July rights announcement; the shares have still marginally outperformed the FTSE100 since mid-year. We upgrade our recommendation to buy.
Elsewhere Petrofac fell 21p to £13.80 after the oil services group raised $750m in its first bond offering.
But BP was in demand after it won a legal battle to limit payouts over the 2010 Gulf of Mexico oil spill, in a move that could save the company billions of dollars. It closed 1.1p better at 438.25p yesterday. Analysts at Societe Generale said:
BP has argued repeatedly that the terms of the multibillion-dollar settlement for economic losses arising from the 2010 Deepwater Horizon accident had been misinterpreted by court-appointed claims administrator Paul Juneau, allowing unaffected businesses to receive money.
With claims still coming in and still to be settled under the disputed methodology, BP had warned (as fully expected by the market) that it would have to start paying additional claims out of its [profit and loss account] by making additional provisions as early as the third quarter results. BP's legal team will now need to review the court decision and decide if that should still be the case, and if so, on what basis BP's accountants should calculate future claims. But the bottom line, in our view, is that if a business cannot prove Macondo impacted it, then it should not be in receipt of BP shareholders' cash and those who do not deserve compensation should not be awarded compensation.
Tate and Lyle added 6p to 745p despite saying first half profits had been hit by cold spring weather in the US and a slow start to the summer, hitting sales of its sweetener products such as Splenda. The division's profits for the six months were expected to be lower than the same time last year, and it said the outcome of the sweetener pricing rounds would affect its performance in the final quarter. But overall it expected another year of profitable growth. Alicia Forry at Canaccord Genuity said:
We expect there could be relief that the outlook is not worse, especially considering management is usually quite conservative.
Investec's Martin Deboo said:
We read the second quarter update as cautious, with profits expected to be down year on year in the first half, driven by weakness in the US. However full year guidance of growth is being maintained, at least directionally. The implication is that the second half will be better. But with risks to come in the second half from Mexico and elsewhere, this may prove challenging. Our latest numbers look to have the full year covered, but we are below consensus. A lot of bad news is clearly in the price, but arguing a buy case on Tate is going to be hard work this morning.
The long term story remains compelling and plenty of bad news is in the price. But the path to the New Jerusalem in speciality food ingredients is going to be longer and harder than many would have expected.
Vodafone dipped 0.5p to 221.5p but during the week analysts reheated suggestions that US group AT&T could be interested in the mobile phone business, following the $130bn sale of Vodafone's US wireless joint venture stake to partner Verizon. The company also announced that finance director Andy Halford would leave next year, once the Verizon deal was completed.
It was a week for profits warnings. Carpetright fell more than 8% to 616.5p after saying full year results would be below expectations, due to weak markets in the UK and Netherlands. At the same time it announced chief executive Darren Shapland was leaving, with founder Lord Harris returning to an executive role as his replacement.
William Hill lost another 5.2p to 407.8p after Thursday's admission that third quarter profits would be £20m below forecasts.
Earlier in the week consumer group Unilever, 1p lower at £23.66 on Friday, spooked investors by saying it had seen a slowdown in key emerging markets.
Shares in GlaxoSmithKline slid 15p to £15.56 after US rival Eli Lilly warned of slowing growth. But analyst Savvas Neophytou at Panmure Gordon kept his buy rating on the company.