In 2023 Tesco smashed £57.7 billion in group sales and adjusted operating profits of £2.63 billion and a market cap of £20.0 billion, but is Tesco, at this point in time, a good long-term investment?
Today, Tesco is one of the world’s largest retailers. Yet the business can trace its roots back to a market stall, run by founder Jack Cohen, who set up, in the east end of London, in 1919.
On his first day, Cohen made a profit of £1.00 on a turnover of £4.00, and the business hasn’t looked back since.
Tesco opened its first store in 1929 and launched its first branded product “ Tesco Tea” shortly after that. Now, Tesco operates more than 4,600 stores and employs some 330,000 staff.
Profit Forecast
Tesco recently reported its third quarter and Christmas trading performance which showed strong growth in sales, across the UK and the Republic of Ireland.
Q3 sales grew by +7.30%. Christmas sales by + 6.40% and combined 19-week sales grew by +6.90%.
The firm was also able to grow its market share by 15 basis points to 27.90%.
Thanks to what Tesco’s management called “stronger-than-expected volume growth”.
Against that background, brokers Jefferies raised their forecasts, and are now looking for Tesco to achieve sales of:
- £69.40 billion in 2024
- £69.90 billion in 2025
- £71.40 billion in 2026.
Earnings per share or EPS are expected to come in at:
- 24.03p in 2024,
- 25.66p in 2025
- 28.98 in 2026.
That compares to 2023’s 21.85p of earnings.
The consensus price target, among city analysts, for Tescos shares, is 287.50p versus the current Tesco share price of 283.00p.
That said Jefferies has a far higher target of 350.0p.
Are Tesco shares a good buy now?
Tesco currently trades on a trailing PE of 14.57 times and a 12-month forward PE of 12.44.
The fact that the forward PE is lower than that for the trailing 12 months suggests that investors believe that the business is likely to grow from here.
However, that growth may be pedestrian at best.
After all the five-year revenue growth rate is just +2.72% and earnings have declined by more than -11.00% in that period.
A highly competitive sector
Of course, Tesco operates in one of the most competitive segments of any marketplace with traditional rivals such as Sainsbury’s, Morrison and Asda, all vying for market share.
As well as trying to fend off discounters such as Aldi and Lidl, alongside pure-play online grocery services.
Not only has the number of competitors in the UK grocery market been increasing, but so have the channels, through which we purchase and consume our groceries.
With home deliveries, click and collect are just two of the options that have become increasingly popular since the lockdown.
Despite these challenges, Tesco continues to dominate the sector and the fact that the business was able to grow over the third quarter and Christmas trading periods, during a cost of living crisis, tells that is it doing something right.
The stock is perched almost midway between its 52-week high and low prices. Suggesting, that the jury is out about what happens next to the share price.
To some extent that may be out of Tesco’s hands and rest instead with the UK economy, how quickly it rebounds, from a technical recession, and when the Bank of England feels able to reduce interest rates.
Is Tesco a buy, sell or hold?
Right now I think Tesco is a hold.
True, it’s not trading on demanding multiple, however, it is very much focused on the domestic UK, where the economic outlook is still unclear.
And, until we get some more visibility, Tesco’s growth prospects may well be limited.
That said Tesco is the archetypal defensive stock with a solid dividend yield of +3.80% and a five-year dividend growth rate of +55.60%.
If you are looking for stability not fireworks as part of a long-term portfolio then it could be for you.
With over 35 years of finance experience, Darren is a highly respected and knowledgeable industry expert. With an extensive career covering trading, sales, analytics and research, he has a vast knowledge covering every aspect of the financial markets.
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As well as extensive experience of writing financial commentary, he previously worked as a Market Research & Client Relationships Manager at Admiral Markets UK Ltd, before providing expert insights as a market analyst at Pepperstone.
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