Week Ahead: NAPS update | Tesco analysis | New tax year

Good morning and welcome to The Week Ahead - the first to kick off the brand new tax year.

The heat of financial reporting season is well and truly over in the UK. But in the US (where companies report their numbers quarterly and tend to be able to get their figures in line far quicker than here in the UK), the first quarter corporate earnings season starts on Friday when results from three of the big banks are due.

We’ll also see the latest inflation figures from the US on Wednesday, with investors, economists and consumers all watching to see whether the bump in inflation reported in the first couple of months of the year is becoming a trend. Friday’s data from the US showed continued resilience, sparking optimism for the corporate earnings season which promoted more than a 1% increase in both the S&P 500 and the Nasdaq 100.

Back on domestic soil, it’s the first week of the new tax year, which means our national insurance contributions have all declined and the state pension is 8.5% higher. But don’t expect to feel much better off. Inflation in the UK is still proving hard to shift, while a freeze on tax bands means much of the population will have slipped into a higher tax bracket.

The new tax year also means your new ISA allowance has arrived, bringing with it opportunities. Last week, we rolled out a feature upgrade which gives all subscribers access to 25 Folios - you might want to consider using your new Folios to monitor new interesting investment ideas. We’ve put a guide together in the Academy to help you do this - read it here.

In the UK, the biggest corporate earnings story of the week will come from the supermarket sector when Tesco publishes its numbers (on Wednesday). I’m currently taking a closer look at the Tesco investment case, especially in comparison to its US peer Walmart. Check back in later to read the full analysis. And do get in touch to let me know any other stories you’re looking out for in the coming week.

NAPS on a roll - +11% YTD

The domestic market has attracted its fair share of bad press in the first quarter of 2024. The FTSE All Share is up just 2% and the AIM All Share down by the same amount. There’s also an ongoing discussion about the fact that British companies are not being attracted by the domestic market and worrying murmuring that some of the FTSEs bigger companies might soon up and leave.

But we’ve got some good news from Ed’s No Admin Portfolio (NAPS) which is up 11% in the year to date, with 14 of its 20 stocks currently registering a positive performance.

The portfolio is currently being driven by Metals Exploration (LON:MTL) which has almost doubled so far in the year to date and is still looks like it has further to run.

You can find out more about the NAPS process in Ed’s article.

Tesco financial results

It wasn’t long ago that the Tesco investment case looked on the brink of death. A company with a majority market share of an industry that wasn’t growing and starting to feel the pressure of competition from newer upstarts, while its olde world peers got snapped up by private equity. In 2016 the share price floundered at 120p, having fallen from a peak of nearly 500p just before the financial crisis.

But by returning to its roots and focusing on the sale of groceries at supermarkets (not hypermarkets or convenience stores) in sensible locations and providing a membership which offers generous discounts, Tesco has managed to claw back some of the growth. In the last few years it’s managed to maintain hold of its 27% share of the UK grocery markets, while peers including Sainsbury, Asda and (most noticeably) Morrisons have lost ground to Aldi and Lidl.

Financial results for the year to February released this morning (10 April) show that the strategy is continuing to bear fruit.

Revenues excluding fuel (which was hampered by lower retail prices) were 7.4% higher year on year. Operating profits were substantially higher in the retail side of the business - an impressive feat given current inflationary pressures. For this performance, investors can thank the Clubcard - the membership side of the business, which offers major discounts on certain items to card holders. Tesco Clubcard holders are likely to shop for the Christmas dinners at Tesco where they can pick up bags of parsnips and potatoes for pennies. And while they’re there, they are likely to be enticed by the bigger ticket items like turkey and Christmas pudding, which has helped keep the margins higher.

Indeed, a catering company owner I heard talk on BBC’s Wake up to money this morning said that he can sometimes get fresh products cheaper at Tesco than at Booker - the wholesale business it bought in 2017. And those cheap prices for essentials have helped retain high customer numbers and those customers are spending more, as shown by an uptick in volume growth in these numbers.

This model has been shown to work wonders at Costco - the North American retailer for which you need a membership card to shop at. Costco is considered a very low cost retailer. I did all my shopping there when I lived in Vancouver last year because the prices were so low. But all my shopping added up to a pretty substantial expenditure in total (as a member of staff was kind enough to point out when I tapped by clubcard after six months). And it’s that customer loyalty which has helped the company report decent growth and resilient margins no matter what the wider market is doing.

Tesco investors should be encouraged to see it taking a similar path.