Tesco TSCO LN is the UK’s largest retailer with a market cap of just over £25.0 billion.
That’s just a fraction of the size of its US rival Walmart WMT US, but don’t be fooled, Tesco is still a category killer in its own right.
Albeit one that has been hamstrung by a combination of Covid, Brexit, and the war in Ukraine, which created a myriad of problems for the grocer, some of which are still ongoing.
Growth has been hard to come by in this climate, however things now look to be changing.
Recovery
Tesco reported interim results on October 3rd sales were up by +4.0%, over the same period in the prior year. Whilst operating profits grew by +15.60% over 2023/24.
The company has also added to its market share picking up another 62 basis points, alongside an 88 basis points on its return on its investment, or ROI.
Tesco increased its dividend by +10.40%, part of an ongoing capital return plan, that includes a £1.0 bln share buyback that’s due to be completed by April 2025.
The change in circumstances at Tesco has been reflected in the broker comment on the stock.
For example JP Morgan double-upgraded Tesco at the end of November, moving from Underweight to Overweight, saying that it saw upside to the 2025/26 outlook from the Supermarket chain. The broker raised it price target to 410p from 270p as it did so.
We could argue that JP Morgan is late to party, because the Tesco stock price has been rallying for two years. During which time it’s added + 62.0%. That rally is still continuing with the stock making fresh 52 week highs on December 4th.
Tesco’s stock price has comfortably outperformed its largest rival, Sainsbury SBRY LN (drawn in pink in the chart above), though it remains way behind Marks and Spencers, which is up +234.0% in the last 24 months.
That comparison may be unfair because M&S has been through a root and branch reform in that time.. However, if Tesco can continue to ring the changes, then, JP Morgan’s 410p price target doesn’t look too demanding at all, in fact it’s just 10.0% away.
Tesco Forecast
Outlook
A defensive name on the recovery path Tesco remains the number one UK grocer and as with Walmart in the US, it’s in a position to leverage the use of AI and the hyper-personalisation of offers among its 16.30 million clubcard holders.
The prospect of further dividend increases and or share buybacks makes the stock attractive. The domestic UK focus of the business could be an issue should the economy enter a recession but in that environment, Tesco’s defensive characteristics should come to the fore.
Buy it if you like the recovery story.
Pros
- Lockdown and price inflation and the worst of Brexit are now behind Tesco and the recovery is well under way.
- Tesco enjoys significant economies of scale and brand loyalty, while privately owned competitors Morrison and Asda are struggling with high levels of debt, and their margin preservation and volume strategies, not to mention the continued encroachment of the discounters.
- FCF, or Free Cash Flow Yield at Tesco is running between 9.00% to 10.0% this key metric should allow the company to grow the dividend going forward or use the excess cash to repurchase more shares as and when the board sees fit.
- Share price momentum continues at Tesco and the stock is rated a buy by 10 out of the 13 analysts who research the stock.
Cons
- Tesco is by nature a low margin high volume business and therefore very sensitive to changes in its cost base. Rachel Reeves’ budget which raises minimum wages, employer national insurance contributions and lowers business rate relief, could well have a knock-on effect.
- Consumer confidence in the UK has ticked up from its October lows but it remains depressed, meanwhile additional government spending could stoke inflationary pressures once more. Tesdco will do better if prices are stable and consumers are confident .
-
Outlook
(3.5)
Overall
3.5
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.
During his career, Darren has acted for and advised major hedge funds and investment banks such as GLG, Thames River, Ruby Capital and CQS, Dresdner Kleinwort and HSBC.
In addition to the financial analysis and commentary he provides as an editor at GoodMoneyGuide.com, his work has been featured in publications including Fool.co.uk.
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.
Darren is an expert in areas like currency, CFDs, equities and derivatives and has authored over 260 guides on GoodMoneyGuide.com.
He has an aptitude for explaining trading concepts in a way that newcomers can understand, such as this guide to day trading Forex at Pepperstone.com
Darren has done interviews and analysis for companies like Queso, including an interview on technical trading levels.
A well known authority in the industry, he has provided interviews on Bloomberg (UK), CNBC (UK) Reuters (UK), Tiptv (UK), BNN (Canada) and Asharq Bloomberg Arabia.
You can contact Darren at darrensinden@goodmoneyguide.com
