Morning Mumble: Tesco thoughts Duncan Fox including Cranswick + Halfords.

Its rare for myself to have consistent thoughts with other commentators and analysts. I have dialogue with quite a few, often disagreeing but for the readers hopefully that comes as no surprise to my trading viewpoint. So from the same stable as Roger Bade, is Duncan Fox.

Duncan has been spot on (my view so far) and in dialogue today, it was interesting that without mentioning the same we were of the view that Lansdowne Partners' short on Tesco is key to a likely change in trend. There's 4 others below threshold which are unwinding, Lansdowne is likely to contribute significantly to the up-ticks as positions (shorts) are reduced (bought back). One to watch certainly...

Also, its noted, and having not being on his mailing list since I went short on Ocado JP did indeed change his views on Ocado belatedly. Apologies to JP for that, having not had site of your views I could only base it on your comments to me. It was still all too late, the valuations on Ocado are/were totally misguided. JP has kindly offered to let me take him out for lunch and a drink, he's so generous! Its ironic I should be paying...alas, one for another day. 

Here's Duncan's thoughts unedited on Tesco (TSCO)...which also have wider implications that I'll hopefully come to when I've had finished my review...I've included Cranswick within that as its a company that's on my radar to short.

Cranswick PLC: NR

The Company has issued a first half trading update, it looks as though the profits will be in-line with last year which is in-line with the Company's expectations. The markets remain difficult, but importantly the capital expenditure that the business is undertaking is going well and should allow the business to address some of the issues that the business has had within advanced cooking and slicing technology, yields should improve as this capex is completed. However, when you are a Company that trades on a PE of 1c.18x, you may need to produce better results than the one's the management are pointing to today.

Tesco: Buy

Again there was a huge amount of column inches for the Company at the weekend, one article suggesting that they would completely change the Board. Well it looks as though they have already started as today Tesco has announced that Richard Cousins (Compass) and Mikael Ohlsson (IKEA) have been appointed as non-executive directors. Clearly lots more will need to be done to get investors back on-side with Tesco, but we are impressed with how quickly Dave Lewis is attacking the issues. There was also one other article that suggested that Tesco shouldn't do what Philip Morris did back in 1993, Marlboro Friday. The reasoning was that the share price fell 26% on the announcement, but it did fail to point out many of the issues behind what happened leading up to, and beyond that day. Philip Morris had for many years just taken the mickey on pricing, aggressively moving them up and making super-normal returns. Not surprisingly that created competition that ate away at their market share. Philip Morris went for the nuclear option and wiped out the competition, it did hurt short term profits (it took them c.7 years to regain the level of profitability in the US), but allowed the business to get back to a growth footing. Prices of cigarettes grew again later that same year, so although a 20% cut was massive news, they went to a system where prices grew just more than duty. For the long term this has been exceptionally profitable for the industry, not just Philip Morris. Essentially we believe Tesco needs a nuclear option. We believe this will lead to a different way of trading, far less discounts (a sort of EDLP model [Edit:Every Day Low Pricing]), more collaboration with manufacturing companies and a much bigger focus on cash flow (about time in that industry). This will hurt short term profits (shares already discounting a big chunk of this), but long term the market will be different with the winners making far more reliable and consistent returns. We believe Tesco has to drive this as they have scale. If we look at the large shifts in the Consumer space it has been led by the large companies; Every Day Low Pricing was P&G and took 6 years to implement properly, Marlboro Friday by Philip Morris and was one extremely interesting day. Both of these events happened just after the last large recession of the late 1980's early 1990's, so the timing for Tesco to do something feels right too.

Bold items are my addition. It reiterates my viewing that TSCO is become a recovery buy, all is not currently lost with TSCO, there's a model that can adapt and with the first shots being fired by Morrison's (MRW) price match, there's going to be a shift in expectation and perception for the consumer. Expect some dents in margins and revisions in profit expectations but often when fear is there, when the door is answered no one is there!  

Also, staying with retail, one would be wise to consider the Halfords (HFD) stable with the store revamps and higher focus on revenues/margins, Halfords might just be starting to turn into a long and longer-term hold. Christmas could be very competitive but what is positive is the dynamic changes in store layout and offerings. Someone in Halfords is starting to understand what has been required for a long-time. Even basic consumer greetings have been improved. Surely not now giving a consumer appreciation and value!

Atb Fraser