Today I’m looking at the investment prospects of two British giants.
Past its sell-by date?
Many investors got their hands burned last year after a sales uptick at Tesco (LSE: TSCO) prompted hopes of a much-anticipated turnaround at Britain’s biggest retailer.
Kantar Worldpanel data in February 2015 showed Tesco’s sales tick higher for the first time in a year, prompting the body to comment that “Britain’s largest retailer is bouncing back from a tough year.”
Industry insiders had taken this as a sign that recently-installed chief executive Dave Lewis’s recovery strategy was producing results. But till activity turned lower again just a few months later, a trend that has continued since — indeed, Kantar’s latest release showed revenues at Tesco slipped a further 1% during the three months to 24 May.
Tesco has thrown the kitchen sink at trying to stop shoppers flocking from its stores, from slashing prices and improving its online operations to reducing the number of items it stocks to make it easier for consumers to compare prices.
But these measures are clearly not resonating with grocery shoppers. And Tesco’s market share is likely to keep sinking, in my opinion, as aggressive expansion from both no-frills and premium chains splits the company’s customer base.
The Cheshunt chain needs to start pulling rabbits out of hats to fight off the rampant rise of Aldi and Lidl. And I believe an elevated forward P/E ratio of 23 times for the current fiscal period indicates that now is certainly not a tempting time to pile-in.
Banking bothers
I’m much more optimistic concerning the long-term outlook for HSBC (LSE: HSBA).
The bank’s sprawling emerging market presence promises to deliver rich returns in the years ahead as population growth and rising personal affluence levels power demand for financial products. HSBC currently sources around two-thirds of group profits from Asia Pacific alone.
However, the economic bumpiness currently washing over these territories means that investors should be braced for bottom-line issues in the months ahead — indeed, the banking leviathan saw pre-tax profits from Asia sink 10% during January-March, to $3.46bn.
But this isn’t the only problem that could set HSBC back in the months ahead. Of course the shadow of hulking PPI bills continues to hang over the entire banking sector, and is likely to do so until a proposed 2018 deadline comes into view.
And the impact of these heavy financial penalties on the balance sheet could also prompt HSBC to re-evaluate its progressive dividend policy, a scenario that could also spell disaster for the bank’s near-term share price.
Still, it could be argued that these problems are currently baked-into the share price, with HSBC dealing on a prospective P/E rating of 10.3 times. I reckon that now is a good time for long-term investors to tap into the firm’s great growth prospects for the coming years.
