Broker ING has upgraded Tesco ahead of next month’s interim results, despite concern among some analysts that the grocer is suffering at the hands of resurgent rivals.
ING analyst Peter Brockwell said that worries about Tesco’s UK performance have overshadowed the importance of the growing services division and international prospects. He increased his price target by 25p to 415p.
Brockwell said: “How big a concern is this underperformance? While a clear investment risk and a continuing concern, investors should put these issues in the context of its still dominant 31% market share.”
Tesco has relaunched its Clubcard scheme, including the award of double points on purchases. Brockwell said: “Strategically, this relaunch could prove to be well timed. We suspect the recent spike in inflation to a peak 9.2% year on year last October has disoriented customers and encouraged previously loyal Tesco customers to search for one-off promotional deals.
“With lower inflation now a feature of the industry, we expect Tesco to benefit from its loyalty programme on a scale that the likes of Asda and Morrison would find almost impossible to replicate.”
However, Oriel analyst Jonathan Pritchard, who rates Tesco a sell, feared the double points scheme had started sluggishly.
He said: “One would have expected an immediate spike in sales given the level of advertising and the extra 1% of margin giveaway, but two FMCG manufacturers have reported to us that they have seen no change in trend as yet.”