Why it's still far too early to buy Tesco plc and Royal Dutch Shell plc


While share prices over at Tesco(LSE: TSCO) and Shell (LSE: RDSB) have surrendered some ground in recent sessions, both stocks have put in a sterling performance so far in 2016.

Tesco has seen its stock value add a chunky 16% during the period. And the supermarket's FTSE 100 peer has risen by almost a quarter since the bells rang-in New Year's Day.

But I believe frothy buying activity masks both firms' still-patchy earnings outlooks.

Shelve it

Shell's ascent has been fuelled by improving investor optimism over the oil market's enduring supply/demand imbalance. Indeed, speculation that Saudi Arabia and Russia were orchestrating a production freeze at the start of the year got Shell off with a bang.

And more recently, the oil major's international bias has seen it emerge as a top pick for those fearful of a post-Brexit economic slowdown.

But a revenues bounce-back at Shell is far from assured, in my opinion. US drillers are picking up their tools again, and latest Baker Hughes data showed another seven rigs plugged back into the ground last week.

While the latest total of 414 units may be down 238 from the same point last year, signs that North American producers are acclimatising to the sub-$50 per barrel environment casts doubt over the oil market rebalancing within the next year, and with it hopes of a stunning top-line recovery at Shell.

Shell's extensive restructuring programme is helping to strip costs out of the system, while new project start-ups -- like its Stones project in the Gulf of Mexico, where production commenced this month -- is making many investors hopeful that profits may begin chugging higher again.

But until global producers curb their market share grab and cap production, and demand markers pick up significantly, I reckon investors should give Shell extremely short shrift.

Till troubles

Meanwhile, Tesco's enduring wretchedness at the checkout is hardly a ringing endorsement for those seeking exposure to the supermarket sector. The business saw British like-for-like sales growth slow to 0.3% during March-May, decelerating from the meagre 0.9% rise printed in the prior quarter.

And chairman John Allan spiked hopes that a bounce-back could be just around the corner. Speaking to The Telegraph about diving footfall at Tesco's megastores at the weekend, Allan noted that "there is clearly excess space in food retail in the UK," adding that "we have to work our way out of that and that will take a number of years."

In the meantime, Aldi and Lidl are poised to ratchet up their presence in Britain's high streets and retail parks, dragging even more shoppers from Tesco's doors. And the intense competition in the white-hot online segment is likely to become even bloodier too, particularly as US internet giant Amazon has waded in.

Tesco is likely to maintain a programme of expensive intense cost-cutting to stop sales falling off a cliff entirely. In this climate, it's difficult to see earnings at the Cheshunt chain snapping back any time soon.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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