Blue Chip: Return Tesco to the shelf

ALL good things come to an end, as Sainsbury demonstrated so cruelly to its shareholders, who thought the good times could last for ever.

Could it be Tesco's turn next among the food retailers? The shares have been on a dizzying rise since late 1993 and now stand at 525.5p, representing a 10 per cent premium to the market. All well and good, perhaps, for a company that has proven qualities of management and a track record of consistent growth in earnings and market share.

And yet ... much of the gains in recent months have been something of a knee-jerk response to the company's defensive qualities in the wake of the Asia meltdown. The prospect for further outperformance in 1998 must be in question. Strong Christmas trading - up 10.5 per cent in the 21 weeks to 3 January, with like-for-like growth of 6.5 per cent - is proof that Tesco's franchise remains exceptionally loyal. However, low food inflation, against possible higher inflationary pressures elsewhere, such as in wages, will be one bugbear in 1998. And a general slowdown in the UK economy will also start to have an impact on the group, especially so perhaps on some of its higher-margin niche products such as the new Finest range.

Its non-food business, chiefly clothing, shows promise, although it is not yet setting the market alight. Non-food products achieve sales densities of around pounds 10 per square foot per week, against pounds 20 for food. However, the pounds 10 figure holds up well in comparison to specialised non-food high street retailers.

By the end of the year, Tesco hopes to have opened another 18 stores in the year, taking its total to 586. That is an annual rate of addition of 4 per cent, against just 1 or 2 per cent for the industry as a whole.

For the current year, the group could make pounds 820m in pre-tax profits, an increase of pounds 75m on 1997. If earnings per share come in at 26.3p, as forecast by Nikko Securities, that leaves the shares trading on a multiple of 19.9 times earnings. That is probably too high - time to take profits.