Tesco tipped to surge 43%

It's been two months since Tesco issued a damaging profits warning. In the aftermath, big gains made off the back of a decent Christmas have been wiped out, and the supermarket titan's share price has hurtled toward levels last seen in 1997.

In fact, Tesco is trading 25% below its peak in late March, compared with a 3% decline for the FTSE 100. It's underperformed rivals Sainsbury's and Morrisons by a big margin, too. Of course, chief executive Dave Lewis's warning of limited visibility on earnings is unhelpful, but some in the City think the sell-off is overdone.

"Some of the other causes of weakness strike us as exaggerated, such as the threats from ASDA and [Amazon's] Amazon Fresh, both of which were highly anticipated and neither of which is necessarily imminent or direct," writes James Anstead at Barclays, who thinks the grocer has a much clearer idea of profit upside medium-term.

"Accepting that current market weakness has exaggerated Tesco's share price fall and has made many stocks look cheaper, we see c150p as very attractive ahead of a likely reassuring trading statement."

Tesco publishes first-quarter results on 23 June, the day of the European Union (EU) referendum, and Anstead tips the company to grow UK like-for-like sales by 0.2% in the 13 weeks to 28 May - likely volume growth of 3% and deflation of 2.8%. Do that and it will be the first time in at least five years it's grown sales for two consecutive quarters. They rose by 0.9% in fourth-quarter.

After a bit of "housekeeping", which takes into account Tesco's exit from Turkey, the partial sale of its stake in Lazada, foreign exchange moves and joint venture income estimates, Barclays trims earnings per share estimates for Tesco by 1% for 2017/18 to 9p and to 11.5p for the following year. The current year is tipped to be flat at 6.5p.

One these numbers, Tesco trades on a recovery multiple of 23 times for the current financial year, dropping to 16 and 13 times for 2018 and 2019.

But all this could be forgotten a day later, as the result of the EU referendum becomes known. A vote to stay in the EU will have no "significant implications" for Tesco or its rivals, but a 'Leave' vote would.

"A vote to leave would likely impact sterling's value against other currencies, although the extent of the possible impact and timeframe are far from clear," says Anstead. "In general, a weaker sterling would tend to boost food inflation - typically helpful for sentiment on the sector.

"In Tesco's case, a weaker sterling should also boost the value of its international earnings and assets in sterling."

Anstead currently rates Tesco as 'overweight' with 215p price target, implying 43% upside. In February, the shares broke above a downward trend line of resistance, which now becomes support, currently at 146p.

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