- 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.
Is Tesco (LON:TSCO) a good investment in the long term?
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.
Like most other shares, the best time to accumulate Tesco shares is when they are down.
The question is when? If we take a glance at Tesco’s chart, around 220p may not be a bad level – although I would prefer to add at a lower level.
In mid-2022, Tesco’s share prices corrected sharply from 300p. That pessimism was caused by the shock rise in energy and food prices, which led to fears of a massive profit margin contraction. But support buying has emerged at around the psychological 200p level. Perhaps the worst is over for Tesco shares.
Investing is about taking calculated risks. If one intends to buy Tesco shares for the long term, a scheduled purchase may work out better as entry price is averaged out over the ups and downs of a stock.
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.
Source: Tesco Plc
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:
- Weak market sentiment – most sectors were impacted when interest rate soared as Bank of England hike rates
- A re-rating of corporation margins – due to cost, energy and labour inflation
- 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.
The City is not highly bullish on Tesco in today’s economic climate. This is understandable. However, could the market be discounting an overly-negative economic outcome?
Compared to a year ago, only half of the investment community are still maintaining a ‘Outperform’ rating on Tesco (12 to 7); while 6 brokers have put out a ‘Hold’ recommendation on the stock. And, only 3 analysts are issuing outright ‘Buy’ recommendations for Tesco.
However, market sentiment can change swiftly. Tesco has rebounded sharply from 200p and perhaps analysts may find themselves missing out the rally.
Out the 11 price targets for Tesco, the median level is 270p, which is not too far from current prices. Perhaps one should wait for a consolidation to buy into the grocery stock.
Source: Financial Times
The current LON:TSCO share price is 262.55p which is a change of 1.65 or 0.63% from the last closing price of 262.55 with 15,279,866 shares traded giving LON:TSCO a market capitalisation of £23,797,210,000. The most recent daily high has been 264.3 and daily low 260.8. The LON:TSCO share price 52 week high has been 307.23 and the 52 week low 194.35. Based on the most recent LON:TSCO share price opening of 262.55, the current LON:TSCO EPS (earnings per share) are 0.1 and the PE (price earnings ratio) is 26.05.
Pricing data last updated 02/06/2023 19:01.
To buy shares in Tesco (LON:TSCO), you need a share trading platform or share dealing account. Follow these three steps if you want to buy shares in Tesco:
- Decide if you want to buy Tesco shares in the short-term or invest in the long-term
- Compare share dealing and trading fees in our comparison tables
- Choose which broker is right for you and open an account
Buying one LON:TSCO share costs 262.55p. However, as well as the 262.55p cost of buying the shares you will also have to pay stamp duty, dealing and custody account fees for holding your shares with a broker. You also have to consider the difference between the bid price (the price at which you sell shares) and the offer price (the price at which you buy shares). These fees vary depending on what sort of account you open, and with what broker. You can compare the different costs associated with the different types of trading and investing accounts in our comparison tables below.