On the shabby side, step forward my old mucker Metro Bank (MTRO), which I have highlighted as a huge dog on multiple occasions over the last year or so, most recently here. The challenges it has faced are legion but ultimately start and begin with an inexperienced team at the top to deal with the UK banking market backdrop into the 2020s. This is why it had the regulatory capital issue, many unobtainable targets, the farce of the timing of the money-raising and still lots of questions on strategy and ultimate corporate wealth. Quite rightly, the Chair Vernon Hill - a man with certainly entrepreneurial zeal but also a very mixed perception in financial markets - will step down and be replaced by an independent Chair. It will be fascinating to see who decides to take the job because their first decision should probably be focused on whether to strike a deal with a bigger name to ensure the group persists in some shape or form. I continue to suggest you avoid this one like the plague. The key statistic to watch out for in the next update is whether the deposit base has materially exited or not.
Now onto a much better company...and that is Tesco (TSCO). I have been a supporter of 'Tesco Dave' - the CEO David Lewis - since his tenure started in 2014 and as I last wrote here earlier this year, I have been a buyer / supporter of the shares, which have continued to push up. Personally I think Lewis is the guy who effectively saved Tesco from a further bout of deep malaise. He went back to basics on the strategy - improvements in customer service and price primarily - and worked out how to co-exist with the hard discounters. He hauled back some of the more grandiose elements of both the domestic and international strategy plus got the balance sheet in good order. Also the purchase of wholesaler Booker looks smarter and smarter. Now he did not do this alone but he was the front guy who set the tone – and a damn good job he has done.
Looking at the interim numbers, some of the fruits of this are apparent. The sales line is still flattish (indeed negative in some of the international businesses) but 'volume outperformance (in the UK) is really, really strong' with the company getting 'switching gains from everybody'. And why is this? Well better polling data on taste, quality and price certainly helps. However, this is mixed with overtly superior angles on distribution forms and a loyalty offering ('Clubcard Plus') which is in sharp contrast to the utilitarian hard discounters. The net impact is being ahead of the cost reduction plan, delivering the margin target six months early and overt operational gearing ('Operating profit +£285m...Free cash flow +£417m; +105%...EPS +49.8% to 8.17p...Interim dividend 2.65p, +58.7%').
Yes, fixed-in-the-mud value investors will want an overtly high dividend yield (currently running around 3%+) or even a lower static earnings ratio, but they probably have not been believers all the way up from the dog days in late 2015 below 150p/share. Actually this highlights a good point. David Lewis has not presided over a huge romp in the Tesco share price on an A-to-B basis. Initially the share price struggled a bit because the necessary corporate turnaround medicine did cut some sacred cows. But it was a smart and necessary thing to do. That's management after all. But another skill with management is knowing when to exit stage left. The Tesco story is now more one of building on all this and the announcement that he will be replaced by the summer of 2020 by Ken Murphy, a Boots lifer who most recently was the chief commercial officer of its American parent Walgreens, is no shocker. Unlike Metro Bank, this is a calm and unrushed decision taken from a position of strength and a solid/deep ongoing Tesco executive bench. For me, the Tesco story is still improving (product, returns, use of technology etc.) and I would still buy/be a holder (as I am) given all the above. Big shout out though for 'Tesco Dave'. He will not be short of next step offers.
Filed under: Tesco, Metro Bank, ShareProphets, Bahamas Petroleum, Woodford, Zotefoams, Ted Baker
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