Latest grocery market data from Kantar Worldpanel last week should have caused further panic for investors in Tesco (LSE: TSCO).
Although sales at Britain’s biggest chain rose 1.9% in the 12 weeks to April 23, this was thanks to the later timing of the Easter holiday versus a year ago. And a fall in market share again underlined the problems Tesco is facing at the tills (the firm’s market share fell to 27.5% from 28% previously).
The mid-tier operators are suffering as shoppers flock in increasing numbers to premium chains like Waitrose or to discounters such as Aldi and Lidl. The latter group poses a particular problem for Tesco looking ahead as demand for their cheaper goods is likely to thrive in an environment of falling real wage growth.
And the German chains are preparing to put the boot in by bulking up their UK footprints. Just today Aldi told trade bible The Grocer that it could exceed plans to have up 1,000 stores up and running within five years, and is now mooting a possible 1,300 outlets.
Improving. But still risky
The news at Tesco’s FTSE 100 compatriot Standard Chartered (LSE: STAN) has been a little cheerier over the past few weeks, however.
The banking giant announced in late April that pre-tax profit surged to $990m during January-March from $500m a year earlier. StanChart was helped by an 8% revenues improvement, to $3.6bn, as well as a sharp fall in impairments to $198m from $471m in the same 2016 quarter.
While raising hopes that the earnings misery of recent years may be past, Standard Chartered is not out of the woods just yet. Indeed, the bank noted the impact of intense competition in its far-flung markets, as well as the ongoing battle against increasing regulatory costs, which rose 27% during quarter one, to $309m.
Yet despite their still-patchy investment outlooks, both Tesco and StanChart appear to be chronically overvalued by the market.
For the year to March 2018 the City expects Tesco to report a 40% earnings rise, resulting in a P/E ratio of 19 times. And at Standard Chartered, predictions that earnings will surge from 3.4 US cents per share in the last calendar year to 43.8 cents in 2017 results in an also-elevated multiple of 20.1 times.
I would consider a reading closer to 10 times (the broadly-regarded benchmark for high risk stocks) to be a fairer reflection of both firms missing these targets, however.
Sure, some stocks expecting near-term profits turbulence may boast high readouts as investors anticipate chunky returns in the longer return. But neither Tesco nor Standard Chartered fall into that category in my opinion as competitive pressures and rising costs batter Britain’s supermarkets, and economic cooling in Asia puts the recovery plan at Standard Chartered under additional strain.
And neither can offset these ratios through chunky dividends. Indeed, the businesses both offer up a prospective yield of just 1.8%, falling woefully short of the FTSE 100 average of 3.5%. I see little reason to invest in either share at current prices.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.