It’s time to consider buying Tesco plc again

Bilaal Mohamed discusses whether it’s time to look again at the UK’s largest retailer Tesco plc (LON:TSCO).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tesco (LSE: TSCO) has seen a truly spectacular fall from grace in recent years, with the retailer losing market share to no-frills rivals such as Aldi and Lidl, as well as facing stiffer competition from more traditional rivals such as Asda and Sainsbury’s. So why do I think it could be time to consider buying Tesco again?

Horror show

First of all, let’s not forget the scale of Tesco’s troubles. Shareholders have watched in horror as the UK’s largest retailer turned pre-tax profits of over £4bn in 2012 into a record breaking £6.4bn loss for fiscal 2015. As if that wasn’t dramatic enough, by 2016 underlying earnings had dwindled down from 40.31p per share to just 4.06p per share in just four years.

Loyal shareholders who’ve kept the faith in the nation’s favourite grocer have seen the value of their holdings plummet from 388p per share just four years ago to today’s levels of around 174p. A 55% share price collapse for a previously unshakeable blue-chip retailer is dramatic indeed. Longer-term shareholders have suffered even worse, with the share price now 65% below the 492p peak achieved in 2007.

New vision

As you’d expect, Tesco hasn’t been taking this lying down. The man who came in to lead the firm, the group’s CEO Dave Lewis, has been hard at work trying to regain competitiveness in the supermarket’s core UK business, while protecting and strengthening its balance sheet and rebuilding trust and transparency with the customer. No sooner had he moved into his new job than changes were afoot.

In January 2015 he announced the closure of the group’s headquarters in Cheshunt, Hertfordshire with the loss of at least 2,000 jobs, as well plans to close 43 lossmaking stores, and the cancellation of 49 new large supermarket developments. The group’s new headquarters are in Welwyn Garden City, also in Hertfordshire.

On Wednesday, the group announced that it had struck a deal to offload its opticians business to Vision Express for an undisclosed sum. The supermarket chain has an optician service in 206 of its larger stores, which will continue to operate but as a concession under the management of Vision Express. The move comes after a number of other non-core businesses have been sold off by the CEO in order to concentrate on its core UK supermarket business.

Mega-merger

But it hasn’t all been sell, sell, sell. In January of this year Tesco announced that it had reached an agreement for a mega-merger with Booker Group (LSE: BOK) to create the UK’s largest food group. Perhaps understandably there are concerns over market dominance with Tesco and Booker being the UK’s largest food retailer and wholesaler, respectively.

Full-year results released earlier this month provided some evidence that Tesco may have turned a corner, with operating profits climbing 29.9% to £1.28bn, and like-for-like sales growth being achieved for the first time 2010. I think it could be time to reconsider Tesco. The recovery plan seems to be taking effect, and dividend payments are expected to start again in 2018. The shares are also trading on a much lower rating than in previous years, with the P/E ratio falling to 14 by 2018/19. The glory days may not exactly be back but Tesco is looking increasingly attractive.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »