Repositioning Should Help Buffett’s Worst Major Holding of 2012: Tesco Corporation (USA) (TSCO), Wal-Mart Stores, Inc. (WMT), Target Corporation (TGT)

Tesco Corporation (USA) (NASDAQ:TESO), the UK retailer, is a core holding of Buffett’s Berkshire Hathaway Inc. (NYSE:BRK-B).  Warren Buffett initiated his stake in Tesco  in 2006 and has gradually added to his position since.  In early 2012, a filing indicated a significant increase in the position from 3.21% to 5.08%.  This stock was the worst performing major holding of Buffett in 2012 and is down by 5% since Jan. 6, 2012 – FTSE 100 up 17.17% over the same time frame.  However, since mid-November 2012 the stock has steadily increased and could be positioned for a strong performance in 2013.

Tesco Corporation (USA) (NASDAQ:TESO)About Tesco

Tesco Corporation (USA) (NASDAQ:TESO) is an international retailer based in the United Kingdom.  UK sales contribute around two-thirds of sales.  It also has international operations in China, the Czech Republic, Hungary, Ireland, India, Malaysia, Poland, Slovakia, South Korea, Thailand, Turkey and the United State.  It is essentially the UK version of Wal-Mart Stores, Inc. (NYSE:WMT) andTarget Corporation (NYSE:TGT) with in store opticians, pharmacies, phone shops and restaurants.  It is the world’s third largest retailer.  Wal-Mart Stores, Inc. (NYSE:WMT) has a massive $469 billion in sales while Target Corporation (NYSE:TGT) has $73 billion, and Tesco has $65 billion.  Out of these retailing behemoths, Wal-Mart Stores, Inc. (NYSE:WMT) has has the highest ROA and Tesco currently has the lowest.  While Tesco operates across various geographies and has a diverse product offering, its core business remains the UK grocery business.  The stock tracks most closely to movements in this market.

Tesco is the largest grocery retailer in the UK.  Tesco Corporation (USA) (NASDAQ:TESO)’s operating margin of 6.2% is above that of UK grocery competitors J Sainsbury plc (LSE: SBRY) and Wm Morrison Supermarkets.   Sainsbury’s operating margin is at 3.98%.  It has also initiated a price matching initiative that will issue customers a voucher if the price paid would have been lower at Morrisons, Sainsbury’s or Asda.

There are some key challenges for Tesco Corporation (USA) (NASDAQ:TESO).  First, it is one of the stores in the UK in the midst of a horsemeat scandal that likely led to the slight decline in grocery sales reported in the most recent industry data.  The issue is probably temporary and it will push through this as it did not knowingly sell horsemeat.  Second, conditions in mainland Europe remain difficult and growth is likely to slow from the 8% CAGR since 2008.  It will also likely have to slow opening new locations in Asia, muting growth expectations due to issues there.  Positively, this will contribute to the lower capex forecasts and improved FCF.