Despite nearly doubling from 2022 lows, Tesco shares are still not expensive and present good value for the long-term holder.

Tesco’s share price chart is something to behold. Notwithstanding the obligatory bouts of profit-taking that produced drawdowns of no more than 20%, Tesco shares have been grinding nicely higher since touching 200p in October 2022.

Although shares dipped during the volatility in early August, it has been one-way traffic to the upside since, with only two down days since the beginning of August.

The relative safety of Tesco’s reliable cash flows has proved to be a draw for investors, not only during the recent spate of volatility but also throughout the interest rate hiking cycle and high levels of inflation.

Tesco has managed to pass on higher input costs through a careful pricing strategy, which saw group revenues grow 7.4% from FY23 to FY24 while operating margins grew 42bps to 4.2%. This was no mean feat, given that inflation ran hot for most of that period.

Subsequent evidence of strong leadership can be found in the successful navigation of easing inflation and the growth of Tesco’s market shares.

Sales grew 3.4% in the group’s first quarter as Tesco’s market shares grew 52bps to 27.6%. Tesco are locked into a bitter war of attrition on price with discounters Aldi and Lidl, which threatened Tesco’s market share as shoppers sought out value options amid the cost of living crisis.

However, the deployment budget ranges to rival the discounters have been a big success for Tesco and the mix of premium and budget options all under one roof has ensured market share gains and the maintenance of margins.

With pressures on households now easing with the cutting of interest rates, Tesco may see an opportunity in its Finest range, and households may find a little more cash in their pockets.

The positive environment for Tescos has been reflected in its share price, which is now up 26% year-to-date. However, this year’s gains don’t mean the stock hasn’t got further to run.

Tesco trades at 14.4x forward earnings. This isn’t particularly good value, but it’s certainly not expensive and doesn’t reflect the quality of the stock.

For a capital-intensive business such as Tesco, a Return on Capital Employed of 10 demonstrates its efficient operations. The 3.3% dividend yield is covered 1.9x by earnings, and Tesco is a cash-generating machine with free cash flow remaining in the $2bn range.

We wouldn’t suggest jumping straight into shares at current levels, but they are certainly one for the watchlist.

After releasing its half-year report, it’s clear Vistry’s shift in approach in 2023 is starting to pay off, and shareholders are set to see the rewards.

Vistry Group believes they are on course to deliver 18,000 completions this year, significantly ahead of last year’s 16,118 completions. That is a big jump, especially in this market.

The company’s success ultimately lies in its decision to focus on areas of the housing market where they saw the highest demand and some level of support for the end occupier. 

Vistry’s ’partnerships’ model involves the group working closely with local authorities to provide housing to both not-for-profit and for-profit local authorities, and the private rented sector. The company will still sell to the consumer market through consumer-facing brands Bovis Homes, Linden Homes and Countryside Homes. The group said it’s targeting 35% of its homes to be sold on the open market.

There is a huge undersupply of social and affordable housing in the UK. By working on a tender basis with local authorities, Vistry is completely sidestepping the problems many buyers face with affordability and higher interest rates to deliver to ready, willing, and able buyers in councils and local authorities.

The private rented sector is particularly interesting area given that more people are renting for longer.

It’s very likely Vistry’s success was manifested long before Keir Starmer entered Number 10 Downing Street, but his victory and subsequent pledges have really fired up the afterburners for Vistry.

In its half year report, Vistry CEO Greg Fitzgerald, said;

“The Group’s growth strategy and greater delivery of affordable housing is well aligned to the new Government’s ambitions to address the country’s housing crisis, and uniquely positions Vistry to play a key role in delivering the Government’s new housing targets.”

You shouldn’t underestimate the tailwinds the Labour government will provide Vistry.

The private housebuilding sector has been slow to build houses and has been nowhere near delivering the number of homes the UK needs. Sure, more traditional homebuilders will play an important part in meeting Labour’s 1.5 million new homes target, but the major opportunity lies in low-cost, affordable homes, many of which will be put out to tender by councils.

In this scenario, Vistry doesn’t have to worry too much about finding buyers for the homes; all they have to do is simply build what they are instructed to. This has helped them achieve their growth in completions and is likely to continue to do so.

In addition, Vistry’s developments provide them with homes for private sale through their brands, such as Bovis Homes, allowing them to pursue greater margins from the houses not allocated to local authorities.

The potential to scale this model is material and is core to Vistry’s investment case. 

Vistry’s merit lies not only in its customer base and political events, which play straight into their hands, but also in the valuation the company offers compared to its peers.

With shares at 1,345p, Vistry trades at 15x forward earnings, significantly below Persimmon (19.4x), Barratt Developments (18.3x), and Taylor Wimpey (18.9x). This seems an unfair discount to its peers.

JP Morgan analysts seem to agree and have recently increased its Vistry share price target to 1,550p.

The FTSE 100 gained on Monday after investors used the weekend to reflect on the economic outlook and evidently concluded that last week’s soft jobs report didn’t warrant selling to the extent that was witnessed after the last jobs report in early August.

“The FTSE 100 got off to a strong start on Monday, helped by strength in the resources space as oil prices bounced from their recent lows,” said AJ Bell investment director Russ Mould.

“The index had endured some weakness last Friday as US non-farm payrolls came in below expectations. The outcome seemed to cause the market concern that the US economy is headed for a hard landing after all, as the Federal Reserve readies its first interest rate cut of the current cycle.

After two years of inflation and monetary policy dominating the macro narrative, growth is firmly at the forefront of investor thinking.

Investors were able to take high inflation and rising interest rates in their stride because, despite persistent predictions to the contrary, growth remained robust over the past two years. 

Job creation in the US was strong, and the economy ticked along very nicely. However, this looks set to change, and the potential implications for company earnings have sparked a wave of concern through markets. 

The doomsayers will highlight slowing job creation and historical correlations with growth rates, while the more optimistic market participant will look to the Federal Reserve, Bank of England, ECB, and current interest rates and conclude major central banks have plenty of space to ease policy and support their respective economies. 

These are the factors markets will tussle over in the coming weeks. 

Entain

In London, Entain led the FTSE 100 higher with a 5% gain after the betting company alluded to improving trading conditions in the second half of the year as the new CEO takes charge.

“Gavin Isaacs has only been chief executive of gambling group Entain for a week and he’s already managed to issue a trading update that’s put a rocket underneath the share price,” Russ Mould said.

“Trading has been good in recent months, helping to restore market confidence in the company’s ability to bounce back after a patchy few years.

“Isaacs will certainly welcome a more positive backdrop as there was a big risk he was wading immediately into quicksand on the first day of the job, having to fight hard to stop the business sinking further into the ground.

Burberry was the top faller, shedding 5%, as it was confirmed that the luxury label will exit the FTSE 100 effective 23rd September. Barclays analysts added to the group’s woes by cutting Burberry to underweight with a new price target of 540p.

Burberry now trades at the lowest levels since 2009 amid a broad decline in luxury fashion brands globally.

Xeros Technology Group shares hit a fresh all-time mid-price low on Monday as investors continued to exit the stock after the company pushed out its timeline for profitability.

In a sobering trading update released last week, Xeros Technology Group plc has announced significant setbacks to its revenue and earnings outlook for the near future.

The company, known for its technologies aimed at reducing the environmental impact of clothing, faces delays in key markets and regulatory uncertainties that have forced a downward revision of its financial projections.

The update paints a grim picture of the company’s short-term prospects. Xeros has dramatically reduced its revenue expectations for FY24 and FY25 to £0.5m and £3.8m, respectively. A substantial decrease from previous forecasts.

Moreover, the adjusted EBITDA loss is now anticipated to be £4.2m for FY24 and £1.0m for FY25, indicating investors are in for a long wait for profitability.

Two major factors contribute to this negative outlook. Firstly, Xeros’s Indian domestic laundry licensee, IFB Industries Limited, has postponed the mass market launch of a 9kg washing machine incorporating Xeros technology from 2024 to 2025. This delay, coupled with a leadership change in IFB’s Home Appliances Division, has pushed back the timeline for Xeros to realise its first royalty revenues in the Indian market.

Secondly, the company has been impacted by regulatory uncertainties in France. While legislation for microfibre filtration in washing machines is in place, the standards and efficacies remain unclarified. This lack of clarity has stalled the anticipated demand for Xeros’s XF3 technology in the short term, further dampening revenue prospects.

The company projects cash balances of £2.9m at 31 December 2024, with current cash standing at £4.0m as of 30 August 2024. While the board expects this to be sufficient to finance operations until achieving month-on-month cash flow break-even in late 2025, the margin for error appears slim.

Ahead of investor meetings this week, Entain, the global sports betting and gaming group, has released an update on its strategic progress and trading performance for the second half of 2024.

Gavin Isaacs assumed the role of Chief Executive Officer on 2 September 2024 and will lead a series of investor meetings expected to deliver upbeat developments.

BetMGM, Entain’s US sports betting platform, is finally showing signs of positivity. The platform launched an enhanced experience ahead of the 2024 NFL season, including improved parlay and player prop options powered by Angstrom’s market pricing capabilities, as well as streamlined live betting and bet slip features. BetMGM’s betting experience is very different to the one typical of European platforms and could be considered cumbersome.

BetMGM has also become the first sports betting app to offer Nevada bettors seamless, nationwide connectivity through a single digital wallet.

Investors will be delighted to learn that Entain’s gaming performance in the second half of 2024 has surpassed expectations.

The company reported that the improving momentum observed during Q2 has continued, with Online Net Gaming Revenue (NGR) growth during H2 2024 to date exceeding anticipated levels.

The UK and Ireland Online segment, which has been a worry for investors recently, has returned to year-on-year growth earlier than expected.

International and Central and Eastern European regions continue to perform well, while retail performance across all regions remains in line with expectations.

Entain shares were 5% higher at the time of writing.