Securities Analysis CW 2012

FR2100
SECURITY
ANALYSIS
An CAO 110017566 (33.3%)

Hai HUYNH 110027998 (33.3%)
Minh PHUNG 110004945 (33.3%)
BSc Investment &

Financial Risk
Management Part 2
FR2100
SECURITY ANALYSIS
December 7, 2012
TABLE OF CONTENT
Pages
I.
EXECUTIVE SUMMARY
II.
THE UK ECONOMY
1. Business Cycle 2007 -2012
4-9
4-6
1.1. Financial Crisis

1.2. Double-dip recession & Recovery
III.
2. Stock Market & The Economy
7-9
3. Conclusion
THE FOOD RETAIL INDUSTRY

1. Industry Overview
10-14
10
2. Porters Competitive Forces
11
3. Industry Cycle & Identification of Stage
12
4. Industry vs. The Economy
13
5. Forecasts and Conclusion
14
Cass Business School | BSc IFRM 2
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SECURITY ANALYSIS
December 7, 2012
IV.
THE COMPANY ANALYSIS

1. Company Brief Description
15-23
15
1.1. Company Introduction

1.2. Companys Main Competitors
2. Company Past and Present Performance
16-23
2.1. Income Statement Analysis
16
2.2. Balance Sheet Analysis
16-17
2.3. Key Ratios Analysis
17-21
2.3.1.
2.3.2.
2.3.3.
2.3.4.
2.3.5.
Liquidity Ratios & Expense Management Ratio

Profitability Ratios
Efficiency Ratios
Capital Structure Ratios
Investment Ratios
2.4. DuPont Analysis
21
2.5. Share Price Performance
22
2.6. Key Challenges and Future Targets
23
2.6.1. Key Challenges

2.6.2. Future Targets
V.
CONCLUSION SHOULD WE INVEST IN TESCO PLC?
24-25
VI.
APPENDIX
26-27
VII.
REFERENCE
28
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I.
EXECUTIVE SUMMARY
Over the past year, the UK has suffered a double-dip recession in early 2012. Unemployment rose to
above 8% for 2 quarters and investor confidence plummeted. Recent news has shown signs of
recovery. However, the gloomy days are not yet over. With that economic setting, investors are
shifting their funds into government bonds and safer stocks in defensive industries such as the food
retail market.
Tesco plc. is one of the most well-known brands in the sector. This report aims to analyse Tesco
stock using the top-down approach and ultimately reach a conclusion whether it is a good
investment. Firstly, historical trends in the economy are analysed and future expectations are
discussed. Then, the report goes to explain special characteristics of the industry and its relationship
with the economic conditions. Finally, Tescos financial performance is assessed and compared with
those from other competitors.
We collected macroeconomic and industrial data from Bloomberg for broader analysis of the food
retail sector. Additionally, financial statements and key ratios are collected from Thomson One
Banker database for specific assessments on the company performance.
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II.
THE UK ECONOMY
1. Business Cycle 2007 2012
1.1.
Financial Crisis
Figure 1 - UK GDP
Late 2007, the credit crunch caused by the US housing bubble halted financial flows in the market,
and thus, the UK government encouraged banks to lend to each other and promote liquidity. This,
however, adversely increased tension between the banks instead.
In January 2009, the UK was officially in a recession after report that the economy had been
shrinking for two consecutive quarters (Wearden, 2009). Unemployment rate rose rapidly to almost
8% in a year (Bloomberg). The economy was on the brink of collapse. UK Real GDP declined by 2.1%
at the last quarter of 2008 (Figure 1). Inflation kept rising, making it difficult to cut interest rates and
alleviate the situation.
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1.2.
Double-dip recession & Recovery
Figure 2 - UK 1 Year Gilt Yield
In response to the crisis, the BoE slashed interest rate to a historic low level of 0.5% as reflected by
the UK 1-Year Gilt Yield (Figure 2). Despite this, GDP was still falling. The economy came out of the
crisis in late 2009, only to suffer a double-dip recession in 2012 due to the Eurozone debt crisis spill
over. The BoE maintained a low interest rate and pushed further the quantitative easing program
they started in 2008.
In late September, the economy finally climbed out of the recession with the help of the Olympic
effect and undertaken macroeconomic policies. The GDP grew by 1.0% according to latest figures
(BBC, 2012). Unemployment fell below 8.0% for the first time after a year and inflation rate was
stable at 2.5% in the last quarter (Bloomberg).
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3
2
Figure 3 - The Conference Board LEI (Bloomberg)
Figure 3 reflects the historical events in the economy over the past years, defining the business cycle
with peaks and troughs, showing the financial crisis (1), recovery (2) and the second recession (3).
As seen on the graph, the Coincident Economic Index (CEI) and real GDP follow similar patterns. The
upward trend at the end indicates that the economy has passed the trough point and is starting to
recover.
The Leading Economic Index (LEI) shows changes before real GDP does. This index is based on
indicators such as stock prices, consumer expectations etc which can be used to predict future
trends of the economy. The latest LEI trend shows a slight upward movement, also indicating a slow
future recovery.
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2. Stock market & the economy
Figure 4 - FTSE 100 Index (Bloomberg)
The stock market tends to be an indicator of the economy performance, and thus also reflects the
business cycle. As seen in Figure 4, the FTSE 100 index has a close correlation with real GDP, showing
similar peaks and troughs. Share prices reflect investors expectations as they exit the market before
a downturn and return during a recovery. These movements of capital flow drive prices up and down
(Investopedia, 2012).
However, there is a noticeable time difference between changes in the FTSE 100 index and real GDP
change. We can see that at several peaks and troughs, stock price changes approximately one
quarter before GDP does. This is because share prices reflect investor expectations/predictions of
future prices, which happens before actual changes in the economy. Similar to the Conference Board
LEI, the upward trends suggests a rise in GDP in the near future.
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Figure 5 shows the P/E Ratio of the FTSE 100 companies. The Price Earnings ratio reflects how many
times over earnings are investors willing to pay for a stock. This means that the higher the ratio, the
more confident investors are about future returns of that stock.
/ =
As seen below, P/E ratio fell in 2007 and rose sharply in 2009, reflecting investors views on the
financial crisis. The ratio went downwards again due to the Eurozone debt effect as well as the
second UK recession. However, the latest trend shows signs of increments, suggesting that investors
confidence is rising.
Figure 5 - FTSE 100 P/E Ratios (Bloomberg)
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An upward slope of the UK Gilt yield tells us that general expectations indicate future growth. This is
because investors expect interest rate to rise in the coming boom time, thus driving higher yields for
bonds with longer maturity (Figure 6).
Figure 6 - UK Gilt Yield (Bloomberg.com)
3. Conclusion
In conclusion, all economic indicators point towards an improving economy with more optimistic
expectations. Investor confidence is regaining and the stock market is performing well. However,
growth rate is expected to be quite slow in the immediate future.
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III.
FOOD RETAIL INDUSTRY

1. Industry Overview
Figure 7 - UK Food Retailers (Bloomberg)
Firms in the food retail industry are mainly merchandisers, consisting of large supermarket chains.
The Big Four are dominating the market with concentration ratio of 75.70%. Key players in the
industry have become globalized, operating across many different countries, and thus competition in
the UK involves major international firms as well (i.e. Wal-Mart a.k.a. Asda). Figure 7 shows UK (only)
food retailers and their market capitalisation.
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2. Porters Competitive Forces
Others
24.30%
Asda
17.20%
Morrison
12.20%
Tesco
29.70%
Sainsbury
16.60%
Figure 8 - UK Food Retail Market Share
Competition is intense in the industry. Firms utilize both price and non-price competitive practices to
attract customers. There is relatively no cost for switching brand, and thus rivalry between firms is
substantially high. This low cost also means that customers can easily buy the same products from a
different brand if they are cheaper. This means there is high consumer bargaining power to drive
prices down.
Existing firms size in the market allows setting prices to earn supernormal profits, not mentioning
the possibility of collusion. The Office of Fair Trading are keeping close tabs on the Big 4 due to their
current scandals of price-fixing and misleading promotions.
On the other hand, bargaining power of suppliers is limited. Since there are only a few key players in
the market, the supermarket chains dictate the prices (monopsony) and if the suppliers do not
agree, they are left with little choice of buyers. Running a supermarket chain requires a lot of capital,
properties, expensive equipment and other sunk costs. Large firms with competitive advantages
such as economies of scales and efficiency (one-stop-shopping), in addition with the strong existing
consumer loyalty, ensures that threat of new entrants is relatively low. However, leading firms in the
UK only occupies 75% of the market share, and entrants are still made possible by takeovers, which
has been done before entered the UK (i.e. Wal-Mart by taking over Asda).
Lastly, since existing firms offer variety of staples (essentials) products, there are little substitute
threats for the industry. Although small convenient stalls (off-licences) are emerging, supermarket
chains like Tesco are opening smaller branches to increase their reach towards the consumer base
(u_upal, 2010).
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3. Industry Cycle & Identification of Stage
Figure 9 - UK Food Retail Sales Growth
In 2011, the grocery market was worth 156.8 billion, an increase of 3.8% from 2010 (IGD, 2012).
Figure 9 shows that the industry continued to grow despite economic conditions. However, growth
has started to decline in recent years.
The industry is also as diversified as it is large. Competing firms are branching out to other sectors
such as insurance, banking and finance as a way to spread risks, exploit potential returns and
increase consumer loyalty. Firms are also likely to have reached productive efficiency (minimum
cost) after the revolution of online shopping.
As mentioned, growth is starting to flatten. Costs are stable rather than decreasing and competition
is becoming more intense in the industry. Thus, we can conclude that the food retail industry is
currently in the stabilization stage.
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4. Industry vs. The Economy
Figure 10 - Industrial Sales vs. UK Real GDP Growth
Food and other grocery goods are basic necessity. Thus, the industry performance is unlikely to be
affected significantly by the business cycle. The UK Food Retail industry has been growing steadily
throughout the period 1990-2012 (Figure 10). The financial crisis in 2008 did not affect sale growth,
but turned out to be the highest comparing to recent years (Figure 9).
However, inflation could affect consumers purchasing power. Therefore, fewer goods would be
bought at higher prices that are passed from increasing costs of supplies. Retailers would have to cut
their profit margin to keep prices low to maintain demand. We can see that sale growth has slowed
down since 2010 as the effect of high level of inflation arising from recent quantitative easing, and
the effect of the Eurozone debt spill over. Percentage change was around 3.3 on average in 2010
and the trend is declining (IGD, 2012).
Because the effect of the business cycle on food retail industry is insignificant, we can conclude that
this industry is non-cyclical (defensive industry).
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5. Forecasts & Conclusion
Figure 11 P/E ratio for FTSE 350 Food & Drug retailers
The P/E ratio trend declined significantly during the financial crisis and has not fully recovered to
pre-recession levels until now. The ratio kept going downwards soon after, reflecting low investor
confidence during the difficult economic conditions. However, latest trends since June 2012 showed
a sign of increments, suggesting growing confidence as the market is slowly improving. Investors are
expecting the industry to recover in the near future and confidence is rising again.
From the findings above, we can conclude that the food retailing industry is a non-cyclical industry,
which constantly achieve growth despite economic conditions. It has, however, reached the
stabilization stage as growth is slowing down and competition is getting more intense. Although
investor confidence has not improved to pre-recession level, there are positive expectations about
the near future.
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IV.
COMPANY ANALYSIS
1. Company Brief Description

1.1. Company Introduction
Tesco PLC is a British multinational grocery and general merchandise retailer. It is the thirdlargest global retailer based on revenues and the second largest based on profits (after
Wal-Mart). It has stores in 14 countries across Asia, Europe and North America, employing
almost 520,000 people (Tesco PLC, 2012).
Since the early 1990s, Tesco has increasingly diversified into other products and services
such as clothing, electronics and financial services (Tesco Bank). This reflects its strategy of
spreading risks and absorbing more consumer surplus from different segments.
1.2. Companys main competitors
Tesco is a multinational grocery firm operating across continents. Its main operation,
however, is based in the UK, with 66% revenue coming from this market (Tesco, 2012).
Therefore, we are comparing Tescos performance with UK competitors in this report.
Since Tesco overtook Sainsburys as the largest supermarket in 1995, it has grown to be the
only firm with technical monopoly power in the UK. In 2001, Tesco occupied 15.6% of the
grocery market share and the number had increased to a massive 29.7% in 2012 (around 12%
more than its nearest market rival, Asda) (Corporate Watch UK, 2004). However, Asda was
taken over by Wal-Mart, meaning they are not primarily based in the UK. Additionally, Asda
is not a public limited company, and thus Morrison plc. would be more suited as a
comparable.
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2. Company Past and Present Performance

2.1.
Income Statement Analysis

FY 2008
47298
3630
2978
2124
Net Sales
Gross Profit
EBIT*
Net Income
FY 2009
54327
4218
3244
2161
Tesco
FY 2010
56910
4712
3674
2327
FY 2011
60391
5047
3943
2655
FY 2012
64539
5267
4161
2806
Sainsburys
FY 2012
22294
1202
898
598
Morrison
FY 2012
17663
1217
986
690
*EBIT: earnings before interest and tax

Full statement in the appendix
According to the table above, there is an improvement in the Tescos revenue in the past 5 years.
There was a 15% sale growth driven by the recovery of the UK economy from FY 2008 to FY
2009.Then, the trend kept growing consistently in the years that follow, peaking at 64 billion in FY
2012. The firms EBIT also as increased from 3 billion to above 4 billion in the past 5 years.
Amongst its other rivals (Sainsburys and Morrison) in the UK, Tescos sales and EBIT were much
higher. In FY 2012, Sainsburys and Morrison earned only 0.8 and 0.9 billion before taxes and
interest respectively whilst their sale revenues just equalled to one third of Tescos figure.
2.2.
Cash and ST
Investments
Receivables
Account
Payable
LT debts
Retained
earnings
Balance Sheet Analysis

Tesco
FY 2008
2245
FY 2009
5124
FY 2010
4357
FY 2011
3040
FY 2012
3589
Sainsburys
FY 2012
808
Morrison
FY 2012
243
686
3936
4898
4748
3969
5084
4849
5782
4746
5971
225
1903
237
1409
5972
6854
12391
7776
11744
9088
9689
11211
9911
12204
2617
3737
1600
5051
Full statement in the appendix
Since 2008, cash and receivables have been increasing significantly, improving liquidity for the firm
and allow them to meet financial obligations. Alongside with that, Account Payable have also
increased, suggesting that the company has increased trading on credit, requiring better credit
control to minimize risks.
From 2009 to 2010, the firm significantly increased its long term liabilities by 100%. This puts them in
a dangerous position of high gearing. The debts were however paid off as the years go by and
gearing is back to normal in 2012.
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The rising trend of retained earnings shows that the Tesco tends to re-invest more earnings back to
the firm. Super-investor Neil Woodford expressed that the firm should become a more cash
generative, less capital intensive business... and to demonstrate it has become a business more
focused on shareholder returns. (Watson, 2012).
2.3.
Ratios Analysis
2.3.1. Liquidity Ratios and Expense Management Ratio

The liquidity ratios are used to determine a company's ability to meet its short-terms debts
obligations. Expense Management ratio (TIE) determines the ability of the firm to meet core
financial obligations such as interests on long term debts.
Current
Ratio
Quick
Ratio
FY 2008
0.58
FY 2009
0.75
Tesco
FY 2010
0.73
0.29
0.56
0.52
FY 2011
0.67
0.44
FY 2012
0.67
Sainsbury
FY 2012
0.65
Morrison
FY 2012
0.57
0.43
0.33
0.21
Data collected from Thomson One Banker
Generally, a current ratio of 2:1 and a quick ratio of 1:1 are considered healthy. The difference
between current ratio and quick ratio usually determines the liquidity of a firm as it differs in
accounting inventories in calculations. However, because supermarket chains like Tesco operate
mainly with inventories which can be converted to cash easily, lower values are acceptable, and the
difference between the two ratios does not reflect illiquidity.
Current ratio and quick ratio for Tesco has remained quite still in the acceptable range over the years,
and the values prove they have higher liquidity than other competitors. The expense management
ratio value (TIE 2012 =
4161
557
= 7) suggests that the firm is well able to cover their financial obligations.
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2.3.2. Profitability Ratios

The profitability ratios are used to assess a business's ability to generate profits as compared to its
expenses and other relevant costs incurred during a specific period of time (Investopedia, 2012).
+ (1 %)

; =

=
( )

ROA (%)
ROE* (%)
ROCE* (%)
NPM (%)
GPM (%)
FY 2008
8.43
17.98
15.04
4.49
7.67
FY 2009
6.44
16.70
11.59
3.98
7.76

; =
Tesco
FY 2010
5.94
15.94
12.26
4.09
8.28
FY 2011
6.45
16.06
13.40
4.36
8.28
FY 2012
6.38
15.79
13.21
4.35
8.16
Sainsbury
FY2012
5.83
10.62
9.76
2.68
5.39
Morrison
FY2012
7.56
12.78
13.05
3.91
6.89
* Calculations shown in the excel file and the rests collected from Thomson One Banker
In general, we can see that Tesco profitability has been sustained over the years with minor
variations. Return on assets, equities and capital employed have slightly declined while NPM and
GPM has shown increments. Nevertheless, all of Tescos profitability ratios are significantly higher
than its rivals.
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2.3.3. Efficiency Ratios
Efficiency ratios are typically used to measure how well a company uses its assets. For example,
assets turnover measures the amount of sales generated for every pounds worth of asset.
=
=
Assets Turnover
(times)
Inventory
Turnover(times)
FY 2008
1.57
FY 2009
1.18
Tesco
FY 2010
1.24
FY 2011
1.29
FY 2012
1.27
Sainsbury
FY 2012
1.81
Morrison
FY 2012
1.79
19.58
19.19
18.83
18.50
17.11
23.53
23.07
We can see that both Asset Turnover and Inventory turnover ratio are declining since 2008. Asset
turnover for Tesco this year was 1.27, lower than its competitors. This suggests that Tesco might be
more capital intensive and is able to generate fewer sales per unit of assets. Inventory turnover
(17.11 times) value is also lower, suggesting Tesco is able to sell their inventory at a slower rate. This
can be explained since Tesco has a much wider range of operations internationally. Therefore, the
firm is exposed to various economic conditions, making it harder to sell inventories.
2.3.4. Capital Structure Ratios

The capital structure ratios determine how a firm finances its operations and growth using different
sources of funds such as debt and equity.
=
=
Debt Ratio (%)

Leverage
(Equity/Assets)
FY 2008
26.80
39.30
FY 2009
35.74
28.11
Tesco
FY 2010
28.86
31.74

FY 2011
23.48
35.06
FY 2012
23.15
35.02
Sainsbury
FY 2012
22.42
45.62
Morrison
FY 2012
17.40
57.74
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In general, the firm managed to slowly reduce the amount of long term debt and raise more equity
to finance its operations. This means they have improved their gearing ratio (Debt/Equity) and
reduced risks for the business. However, comparing to other firms, Tesco still has higher gearing
(more debt, less equity).
2.3.5. Investment Ratios
Figure 12 - Earnings forecast
Investment ratios measure the amount of return generated when investing into a company as well
as other measurements that reflects expectations about choosing to invest in the stock.
=
=
Tesco
EPS () *
Price earnings*
FY 2012
0.35
9.74
Sainsburys
FY 2012
0.32
10.57
Morrison
FY 2012
0.29
10.00
*EPS calculated in excel file and PE collected from FT.com
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According to Figure 12, EPS growth has been flattening in recent years. However, forecasted growth
has been shown to be more positive, reflecting future expectations. This year, Tescos EPS is still
slightly higher than other competitors, suggesting that the stock is more attractive.
The firm P/E Ratio is lower than the others, however. This is because of the aforementioned
disappointing Christmas sales last year which lost investor confidence. Share prices dropped sharply
in a day, in turn pulled down the P/E Ratio. The expected growth in earnings would likely bring back
confidence and increase the value in the near future.
2.4. DuPont Analysis
The basic DuPont Analysis formula expresses the ROE ratios as functions of 3 ratios reflecting
efficiency, productivity and leverage.
Tesco
Sainsburys Morrison
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2012
FY 2012
NPM
4.49
3.98
4.09
4.36
4.35
2.68
3.91
Asset
Turnover
1.57
1.18
1.24
1.29
1.27
1.81
1.79
39.30
Leverage
(Equity/Asset)
28.11
31.74
35.06
35.02
45.62
57.74
ROE
16.7
15.9
16.1
15.8
10.6
12.8
17.9
Store merchandisers may have very low profit margins on sales, and relatively moderate leverage. In
contrast, they may have very high asset turnover since they operates mainly on selling inventories.
For the past 3 years, Net Profit Margin and Asset turnover have shown a slight upwards trend due to
improving efficiency and management. However, due to increasing investments into the firm (i.e.
Warren Buffetts $2 billion investment) (Gurufocus, 2012), leverage for the firm has increased quite
significantly since 2009, pulling down the ROE to 15.8% in 2012. This value is still significantly higher
than other rivals.
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2.5. Share Price Performance
Figure 13 - Share Price Performance
Tesco and its competitors, Sainsburys and Morrison show similar trends in share prices. However,
Tesco has consistently been outperforming the rest. In 2007, Tesco share price overtook Sainsburys
and reached an all- time high level of 485 pence per share. It then dropped sharply in 2008 reflecting
the effect of the financial crisis. In early 2012, after report that trading over the Christmas period has
fallen short of expectations, Tesco share price fell by 16% in one day. The recent news of Tesco
considering quitting the US market to reduce unnecessary costs has pleased investors with share
price increasing by 7% in a week. With the positive GDP outlook, Tesco share prices should increase
in the near future, provided that Tesco maintains efficiency in its operations.
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2.6. Key Challenges and Future Targets
2.6.1. Key Challenges
Although Tesco is one of the most preferred stocks in the industry, it still faces issues many of which
are similar to other competitors. As mentioned, rising inflation has significantly increased costs of
merchandised goods and thus Tesco has to increase efficiency to keep prices low without affecting
employee welfare. However, a major challenge faced by Tesco is still the heightened competition
from other supermarkets. Such competition is likely to be around for a long time, thus restricting
wider earnings growth for the company (Watson, 2012). The firms diverse operations could absorb
too much management time in an already difficult period. Tescos Fresh & Easy chain in the US has
been unsuccessful in gaining market share and is causing unnecessary costs to the group. Moreover,
the companys banking sector is newly developed and is yet to gain a favourable position in the
sector.
2.6.2. Future Targets

According to the Tesco PLC annual report 2012, a few key targets for the group are highlighted as
below:
-
Grow the UK Core: 66% of Tescos revenue comes from the UK. It is essential that Tesco has
to work towards increasing revenue and customer retention in the UK. The decision to quit
the US market due to unsuccessful endeavours would allow them to focus more on this goal
for the coming years.
Increase in-store and online sales internationally: Tesco operates across many countries in
both in-store and online retail. Therefore, the firm emphasizes on sales growth of online
retail internationally just as they are trying to increase in-store revenue.
To be as strong in all other sectors as in food retail: Tesco has been diversifying into other
retailing sectors such as clothing and Tesco Bank. One of the important goals for the firm is
to grow in these sectors and achieve a favourable position in the market.
Others: Other important goals include corporate responsibilities, employee welfare &
retention, consumer loyalty and creating a highly valued brand.
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V.
CONCLUSION SHOULD WE INVEST IN TESCO PLC?
Overall, we can conclude that with the positive outlooks of the economy and chosen
industry, it is a good time to start investing in stocks from the food retail market. However,
choosing a specific firm in the industry would generate the highest benefits is key.
Figure 14 statistics
Tesco Excessand
Returns
vs. FTSE
100 Excess
Returns
Figure shows the descriptive
trends
of Tesco
excess
returns versus FTSE 100
excess returns over the years. According to the mean and median, Tesco outperforms the
market quite significantly (i.e. -0.000299 > -0.003246).
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Through company analysis techniques, we found out that Tesco outperforms its rivals in
almost all aspects including share performance, liquidity, and profitability and investment
ratios. The firm also controls a dominant market share with a powerful brand which is able
to retain consumer loyalty. Although there have been recent disappointments, the stock is
still one of the more favoured within the industry.
In conclusion, we think that Tesco is one of the best investment options available in the
current climate and economic setting. Thus, the answer is definitely INVEST, and Warren
Buffett thinks so.
25
(Word count: 3139 excluding figures, tables, formulas and appendix)
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VI.
APPENDIX
Income Statement
Net Sales
Costs of
Good Sold
Depreciation,
Depletion &
Amortization
Gross
Income
General
Expenses
Operating
Expenses Total
Operating
Income
NonOperating
Interest
Income
EBIT
Interest
expense
Pretax
Income
Taxes
Minority
Interest
Equity in
earnings
Net Income
FY 2008
47298
42692
FY 2009
54327
48920
Tesco
FY 2010
56910
50814
FY 2011
60391
54495
FY 2012
64539
57820
Sainsburys
FY 2012
22294
20593
Morrison
FY 2012
17663
16114
976
1189
1384
1389
1452
499
332
3630
4218
4712
5047
5267
1202
1217
1027
1619
1955
1561
1564
413
321
44695
51728
54153
57445
60836
21505
16767
2603
2599
2757
3486
3703
789
896
91
91
114
131
114
18
2978
353
3244
552
3674
686
3943
612
4161
557
898
162
986
51
2728
2844
3143
3478
3744
771
947
673
6
788
5
840
9
864
16
879
8
201
0
257
0
75
110
33
57
91
28
2124
2161
2327
2655
2806
598
690
26
FR2100
SECURITY ANALYSIS
December 7, 2012
Balance Sheet
Assets
Cash and ST
Investments
Receivables
Total
Inventories
Other current
assets
Current
assets - Total
Property
plant &
equipment
Other assets
Total assets
Liabilities &
Equity
Account
Payable
ST debt &
current
portion of LT
debt
Income tax
payable
Other current
liabilities
Current
liabilitiesTotal
LT debts
Other
liabilities
Total
Liabilities
Shareholders
equity
Minority
Interest
Common
equity
Retained
earnings
Total
Liabilities and
Equity
FY 2008
2245
FY 2009
5124
Tesco
FY 2010
4357
FY 2011
3040
FY 2012
3589
Sainsburys
FY 2012
808
Morrison
FY 2012
243
686
2430
4898
2669
3969
2729
4849
3162
4746
3598
225
938
237
759
594
803
710
818
930
61
83
5955
13494
11765
11869
12863
2032
1322
19787
23152
24203
24398
25710
9329
7943
2348
30060
FY 2008
4041
46032
FY 2009
4177
45985
FY 2010
4338
47158
FY 2011
4618
50758
FY 2012
160
12340
FY 2012
303
9859
FY 2012
3936
4748
5084
5782
5971
1903
1409
2084
4059
1529
1386
1838
150
115
455
362
472
432
416
149
163
3788
8871
8930
10131
11024
934
616
10263
18040
16015
17731
19249
3136
2303
5972
364
12391
370
11744
776
9689
600
9911
688
2617
1
1600
0
18158
33037
31304
30535
32957
6711
4462
87
57
85
88
26
11815
12938
14596
16535
17775
5629
5397
6854
7776
9088
11211
12204
3737
5051
30060
46032
45985
47158
50758
12340
9859
27
FR2100
SECURITY ANALYSIS
December 7, 2012
VII.
REFERENCES
BBC (2012) 'Olympic effect' helps UK out of recession, 25 Oct, [Online], Available:
http://www.bbc.co.uk/news/business-20080263 [7 Dec 2012].
Corporate Watch UK (2004) Tesco, Sep, [Online], Available:
http://www.corporatewatch.org.uk/?lid=252 [7 Dec 2012].
Farlex (2012) Financial Dictionary, [Online], Available: http://financialdictionary.thefreedictionary.com/capital+structure [7 Dec 2012].
Gurufocus (2012) Tesco to End U.S. Venture Warren Buffett Called 'Foolhardy' - Will He Buy More
Shares?, 5 Dec, [Online], Available: http://www.gurufocus.com/news/200438/tesco-to-end-usventure-warren-buffett-called-foolhardy--will-he-buy-more-shares- [7 Dec 2012].
IGD (2012) UK Grocery Retailing, 17 Apr, [Online], Available:
http://www.igd.com/UK_Grocery_Retailing [7 Dec 2012].
Investopedia (2012) Profitability Ratios, [Online], Available:
http://www.investopedia.com/terms/p/profitabilityratios.asp#axzz2EKjVCBcF [7 Dec 2012].
Investopedia (2012) The Effect of the Business Cycle on Stock Markets, [Online], Available:
http://www.investopedia.com/exam-guide/series-65/economic-concepts/business-cycle-stockmarkets.asp#ixzz2BTtyEjMv [7 Dec 2012].
Tesco (2012) Annual Report and Financial Statements 2012, [Online], Available:
http://www.tescoplc.com/files/reports/ar2012/files/pdf/tesco_annual_report_2012.pdf [7 Dec
2012].
Tesco PLC (2012) Our businesses, [Online], Available: http://www.tescoplc.com/index.asp?pageid=8
[7 Dec 2012].
Tesco PLC (2012) Our history, [Online], Available: http://www.tescoplc.com/index.asp?pageid=11 [7
Dec 2012].
u_upal (2010) UK food retailing industry, 16 May, [Online], Available:
http://www.scribd.com/doc/31435082/UK-food-retailing-industry%E2%80%99 [7 Dec 2012].
Watson, S. (2012) One UK share that Warren Buffett loves, Nov, [Online], Available:
http://g.foolcdn.co.uk/art/download/tmf/0911_TMFUKOneUKShareThatBuffettLoves.pdf?email=raynonine@yahoo.com&iid=27001&repeatecap=&vsaid=4
381&src=u74sittxt0000028 [7 Dec 2012].
Wearden, G. (2009) Timeline: UK recession, 23 Oct, [Online], Available:
http://www.guardian.co.uk/business/2009/oct/23/uk-recession-timeline [07 Dec 2012].
Wikipedia (2012) Tesco, 6 Dec, [Online], Available: http://en.wikipedia.org/wiki/Tesco [7 Dec 2012].
28
FR2100
SECURITY ANALYSIS
December 7, 2012
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Securities Analysis CW 2012

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FR2100

An CAO 110017566 (33.3%)

BSc Investment &

1.1. Financial Crisis

2. Stock Market & The Economy

THE FOOD RETAIL INDUSTRY

2. Porters Competitive Forces

3. Industry Cycle & Identification of Stage

4. Industry vs. The Economy

5. Forecasts and Conclusion

Cass Business School | BSc IFRM 2

THE COMPANY ANALYSIS

1.1. Company Introduction

2.1. Income Statement Analysis

2.2. Balance Sheet Analysis

2.3. Key Ratios Analysis

Liquidity Ratios & Expense Management Ratio

2.4. DuPont Analysis

2.5. Share Price Performance

2.6. Key Challenges and Future Targets

2.6.1. Key Challenges

CONCLUSION SHOULD WE INVEST IN TESCO PLC?

Cass Business School | BSc IFRM 2

Cass Business School | BSc IFRM 2

Double-dip recession & Recovery

Figure 2 - UK 1 Year Gilt Yield

Cass Business School | BSc IFRM 2

Figure 3 - The Conference Board LEI (Bloomberg)

Cass Business School | BSc IFRM 2

2. Stock market & the economy

Figure 4 - FTSE 100 Index (Bloomberg)

Cass Business School | BSc IFRM 2

Figure 5 - FTSE 100 P/E Ratios (Bloomberg)

Cass Business School | BSc IFRM 2

Figure 6 - UK Gilt Yield (Bloomberg.com)

Cass Business School | BSc IFRM 2

FOOD RETAIL INDUSTRY

Figure 7 - UK Food Retailers (Bloomberg)

Cass Business School | BSc IFRM 2

2. Porters Competitive Forces

Figure 8 - UK Food Retail Market Share

Cass Business School | BSc IFRM 2

3. Industry Cycle & Identification of Stage

Figure 9 - UK Food Retail Sales Growth

Cass Business School | BSc IFRM 2

4. Industry vs. The Economy

Figure 10 - Industrial Sales vs. UK Real GDP Growth

Cass Business School | BSc IFRM 2

5. Forecasts & Conclusion

Cass Business School | BSc IFRM 2

1. Company Brief Description

Cass Business School | BSc IFRM 2

2. Company Past and Present Performance

Income Statement Analysis

*EBIT: earnings before interest and tax

Balance Sheet Analysis

Full statement in the appendix

Cass Business School | BSc IFRM 2

2.3.1. Liquidity Ratios and Expense Management Ratio

Data collected from Thomson One Banker

Cass Business School | BSc IFRM 2

2.3.2. Profitability Ratios

Cass Business School | BSc IFRM 2