Tesco PLC: “At Least It Can’t Get Any Worse”

Tesco PLC (LON: TSCO) can’t go much lower, some say… it could be time to buy.

| 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 made so many mistakes over the past year that’s almost impossible to trust the company right now.

But after making so many mistakes, one set of analysts has taken the view that it can’t possibly get any worse for the struggling retailer. For example, according to analysts at Bernstein:

“We can’t see much that the management can do wrong in the next few years that would make the shares worth less than today’s share price,” 

And it’s easy to agree with this view. The bad news has come all at once for Tesco over the past three or four months, compounding declines and not giving investors much time to digest the information before another piece of bad news emerges. 

What’s more, the recent landslide of bad news has actually given Tesco’s new management the excuse they needed to execute an aggressive cost-cutting and restructuring programme.

Unlocking value

With a licence to act however they see fit, Tesco’s new CEO Dave Lewis and his management team can carve up the Tesco empire to unlock value for investors and fund the group’s turnaround.

It seems as if management has already started carving. At the beginning of this week there was some talk that Tesco had placed its Asian assets up for sale, a move that could unlock billions for the retailer. 

Asset sales like these will help steady Tesco’s financial position, which has been under scrutiny recently as the retailer’s debts have grown. It’s estimated that Tesco needs to raise £3bn over the next two years to maintain its investment-grade debt rating. Current estimates show that Tesco has around £6bn of businesses ripe for disposal, including its Asian assets and data analysis arm.

Pessimistic outlook 

Tesco is not the first giant international retailer to get into trouble. Indeed, Tesco’s troubles are similar to those faced by peer Carrefour several years ago as the company suffered from falling sales within France, the group’s home market. However, after several years, asset sales and a restructuring programme, Carrefour has recently returned to growth and company’s share price has doubled from its lows.

For some reason, the vast majority of analysts don’t believe that Tesco can execute the same kind of turnaround. For example, it’s widely believed that Tesco’s profitability will never recover as the company slashes prices to try and drive sales growth. Moreover, some analysts believe that the group’s core portfolio of UK stores will never report a profit. It seems as if these forecasts underestimate the company.

Using Carrefour as an example again, not only has the group managed to return to profit within its home market but the company’s profit margins have doubled as the turnaround has taken place — it’s reasonable to assume that Tesco’s margins could do the same. 

It’s up to you 

Tesco has the potential to stage a comeback but investing with the thesis of, “it can’t get much worse” is hardly a great way to manage your portfolio. Therefore, for investors who are still sitting on the sidelines, Tesco is not a buy just yet. 

That being said, for existing holders there’s no reason to turn your back on Tesco. One of Tesco’s most attractive qualities is the company’s dividend payout. While the company may have slashed this year’s payout, City analysts still expect the company to offer a yield of 2.8% next year. Reinvesting this payout will turbocharge your returns when Tesco’s recovery finally gets under way. 

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.

Rupert Hargreaves owns shares of Tesco. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »