Home > Analysis > Tesco Undervalue or Overvalued?

Fundamentals of a stock matter. But occasionally, macro factors will overwhelm these fundamentals. In 2022, investors were more concerned about the impact of inflation, war in Ukraine, cost-of-living crisis, et cetera. As a result, they are marking down most stocks.

Tesco could not escape from this wholesale de-rating of UK stocks. By some measures, Tesco could be slightly ‘undervalued’ as investors fled from the UK market. And if we measure Tesco’s share in USD, they are down a lot more particular during the autumn of 2022.

However, the market may be too pessimistic about UK stocks, especially those with a good set business operations churning out plenty of profits week in, week out. In the latest RNS, Tesco plc reaffirmed guidance for FY 22/23, with ‘retail adjusted operating profit of between £2.4bn and £2.5bn; retail free cash flow of at least £1.8bn; Bank adjusted operating profit of c.£120m to £160m‘.

Another point worth highlighting – Tesco is actually buying back its shares to the tune of £750 million between Apr ’22 and Apr ’23. A weak company will not be spending cash to buy back its shares if the management is not confident about its future profits.

Tesco LON:TSCO Guidance

Source: Tesco Plc

Why has Tesco’s (LON:TSCO) share price dropped recently?

When I examined Tesco’s daily share price for 2022, a marked fall from 300p is noted. The 33 percent decline earlier was caused by three factors:

  1. Weak market sentiment – most sectors were impacted when interest rate soared as Bank of England hike rates
  2. A re-rating of corporation margins – due to cost, energy and labour inflation
  3. A fall in consumer spending – as the cost-of-living crisis escalates

The spike in energy costs shrunk consumer wallets and this means less money to spend on Tesco’s products.

However, this fear may prove to be overly negative – as reflected in the sharp bounce in Tesco share price from November. The rebound happened because the worst economic fears did not materialise. Oversold, investors returned to equities.

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