Citigroup begins Tesco, 2 others on sell

Citigroup began coverage of the food retail sector, assigning a "sell" rating on three companies, including Tesco, on falling food prices and expected competitive pricing environment.

"Companies, analysts and investors have all been surprised by the severity of the food price falls seen in the US and the impact this has had on earnings," analyst Alastair Johnston said. "We see a similar picture developing in the UK."

August prices were 1.2 percent below the May peak, and September will show a significant fall, the analyst said in a research note dated October 1.

For fiscal 2010-2011, consensus earnings-per-share estimates for Tesco, Wm Morrison and J Sainsbury look to high, the analyst said.

"Looming price deflation will hurt UK sector sales and margins more severely than the companies or consensus are factoring in at present" Johnston said.

The analyst voiced concerns about bluechip retailer Tesco's sales productivity levels on food in the long term, saying they are now only about 12 percent to 13 percent ahead of its peers', compared with 25 percent to 30 percent five years ago.

Johnston set price targets of 360 pence on Tesco stock, 265 pence on the country's fourth-biggest supermarket chain Wm Morrison, and 300 pence on J Sainsbury shares.

"We think Morrison is the most likely UK name to meet consensus earnings expectations next year," the analyst said. "Of the three stocks, we consider Morrison the least unattractive."