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FTSE falls on China worries, with Tesco and Morrisons hit by downgrade

Discussion in 'Market News' started by Lily, Nov 11, 2015.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Downbeat report from Deutsche Bank pushes down supermarket shares

    Leading shares are slipping back again despite a raft of positive company news.

    Worries about a slowdown in China, and the knock-on effect for the rest of the global economy, have been reinforced by a new warning from ratings agency Moody’s that problems in emerging markets will hold back world growth.

    The origin of this report was our ambition to answer three questions; 1) Does Tesco’s scale justify its ambition to recover to an industry leading margin, and what will that industry margin be? 2) Will there be material capacity exit (i.e. store closures), and what does that mean for the sector and stocks? 3) Is price investment the right strategy or, more specifically, are lower gross margins inevitable and permanent? Operating leverage is key to answering these questions. Our conclusions suggest that there is limited upside to sector profitability and that Tesco’s historical margin premium will narrow.

    We resume coverage of Tesco with a hold recommendation versus a buy previously (target price 210p versus 240p previously). We rate Sainsbury’s hold (target price 265p versus 275p previously). We downgrade Morrisons from hold to sell (target price 155p versus 180p previously).

    Aldi can likely invest another 1% to 1.5% in price and still earn a reasonable return. We’d expect the “Big 4” (Big 3 and Asda) to match any discounter price cuts.

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