Tesco results boost the share price, but it’s still worth waiting for more consolidation before topping up.
- Tesco reports sales growth over Christmas (+7.9%)
- Grocer maintains FY profit guidance (£2.4 billion)
- Tesco shares up sharply since last October as the market re-rated the supermarket
Tesco (LON:TSCO) is the British answer to America’s Walmart (see our Walmart share price analysis here). Both command leading market shares in the grocery sector, are ex-growth and are weathering the tricky economic situation fairly well.
Tesco is the leading supermarket in the UK. But being in a commanding position, especially in a competitive sector, doesn’t mean smooth sailing ahead. A lot of work is needed to maintain this lead. Any slip-up will cause share prices to crater.
Warren Buffett famously bought into Tesco and lost a ton of money, $444 million to be precise. When the ‘greatest investor of all time’ can not profit from Tesco shares, what hope the rest of us has got here? Look at Tesco’s 20-year price chart. Prices are trading where they were back in 2001 – 22 years ago! Extrapolating this trend, we could still be trading Tesco shares at two quid in 2042.
What’s the point of buying Tesco shares then? For one, Tesco appears to be doing fine in today’s turbulent market. While inflation has soared to double digits (up 11% in October 2022), Tesco is continuing to generate plenty of free cash flow. We can not say the same for many companies. Tesco has some pricing power too, as it often passes on the rise in food costs to consumers. Its share of the UK grocery market ending 2022 stood at a commanding 27%.
Over the recent Christmas (2022), Tesco’s overall sales grew 7.9%, which is better than market’s expectations. As such, although Tesco share price languished below its 2007 highs, the company remains a viable proposition for investors.
Moreover, Tesco is trading at an inexpensive level. Its dividend yield of 4.77% is generous and its defensive qualities may prove useful in times of highly uncertain market. Tesco may even rack up some growth via its online presence. Indeed, the most recent quarter results shows “online sales returning to growth…. with sales +59% higher than pre-pandemic“.
For conservative investors, Tesco may not be the most exciting stock on the market, but the £17-billion supermarket is likely to do reasonably well in the years ahead despite a period of rising consumer prices. It has a good position in the market and should be able to weather an economic slowdown.