Tesco tops the UK's food shopping list

Supermarkets; Inchcape; Ultra Electronics
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These are bountiful times for the UK's biggest grocers. The consumer has been food shopping in quantities not seen for many years, while the supermarkets have been operating an unofficial truce after the vicious price wars of recent times. It is making for heady sales growth and some impressive profits.

At the top of the food chain sits Tesco, headed by Terry Leahy. It made more than £1bn profit in the year to February, and has a 25 per cent share of the market. Perversely, its shares have tracked only sideways since the start of the year while rivals such as Safeway, Sainsbury, and Somerfield have surged. The stores in this sibilant trio have been recovering from the damage inflicted on them by Tesco during the war years, and yet they seem to have been outpacing industry sales growth of more than 5 per cent by a little less than Tesco.

These relative weaklings are highly vulnerable to a de-rating if the sector suddenly dips from investors' favour – perhaps as fund managers regain the confidence to move back into growth stocks – or if food price inflation begins to ease. Is Tesco insulated, though? Probably not, since it has been bought by international investors as a proxy for the sector and sits on a toppy 19 times this year's forecast earnings.

The company is doing its bit for investor relations this week, calling in the City's retail sector analysts to guide them on how the first half of the financial year has shaped up. The analysts get to run their sales and profit forecasts past management, moving their numbers up or down depending on the expression on Tesco bosses' faces. Companies are not allowed to make public profit forecasts of their own.

Tesco did say yesterday that interim figures due next month will be "broadly in line with the current consensus". That means they will be very good.

Tesco's nascent overseas operations, particularly in Thailand and South Korea, had given cause for concern, and there was relief that these continue to be on track.

But some analysts came away feeling they had learnt Tesco was preparing itself for an end to the UK boom times. Behind closed doors, there was apparently talk of Tesco being prepared to "reinvest in the consumer", and the company is undoubtedly in the best cash position to wage a new UK price war.

The shares, down 3p to 247.5p, remain the finest in the sector. While holders of other retail stocks should consider banking some of their recent profits, Tesco remains a strong hold for investors with a long-term view.


There has been a return to normality at car dealership Inchcape after a first half when it had to fight off demands from Guinness Peat, a 10 per cent-shareholder, that the company should break itself up and return all the cash. It hasn't done so – it bought back £45m of shares to pacify investors dismayed by years of underperformance, but yesterday's interim figures represented a chance to focus at last on the performance of Inchcape's underlying business.

And it's not been bad. Pre-tax profits for the half-year ended June came in at £52.5m, 75 per cent better than the miserable result a year ago, when the "Rip-Off Britain" campaign was discouraging new car purchases. Now, with car prices down some 10 per cent, the UK driver is upgrading again, and pre-sales for the new registration vehicles in September are already ahead of the total in 2000, with more than three weeks to go.

There was good news, too, from the southern hemisphere, where Singapore's taxi fleet is being converted to diesel and the Australian market has come out of the doldrums. The group has also been getting rid of underperforming businesses.

Inchcape's shares have come a long way, in large part thanks to Guinness Peat's intervention. The next leg of the recovery will be harder. It still has some divestments to make, and its performance in the eurozone in the first half was disappointing. The company plans to spend up to £60m on new car dealerships in the UK, focusing on the posh end of the market. And it has a £100m war chest for acquisitions in business services, such as transporting used cars or managing fleets of company vehicles.

UBS Warburg, the house broker, has upped its full-year profit forecast to £96m, giving an earnings per share figure of 60p. Up 19p to 517.5p yesterday, the shares are therefore on a multiple of less than 9. That's not expensive, but Inchcape still has to prove it has definitively turned the corner.

Ultra Electronics

Ultra Electronics, maker of myriad gadgets for the defence sector, has seen global spending in its corner of the defence procurement industry rising inexorably as governments upgrade surveillance systems, counter the threat of coast-hugging submarines, or improve their "battlespace IT" – jargon for the data systems used to improve war planning.

Figures yesterday were bang in line with market expectations, showing pre-tax profits up 6.5 per cent to £12.5m.

Some contracts have slipped, as they are wont to do in the industry. But Ultra's order book has swollen 15 per cent since the start of the year and now stands at £316m. £200,000 of its switches, pilot controls, and missile cooling systems will go into each of the 150 Eurofighters, whose production begins within weeks and gets ratcheted up in 2002.

On a price-earnings ratio of 13 on forecasts for this year, the shares, up 18p to 425.5p, are far from stretched and are a long-term buy.