Tesco Plc: Buy, Sell Or Hold?

What are the long-term prospects for 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.

I’m always searching for shares that can help ordinary investors like you make money from the stock market.

Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at Tesco

Today I’m evaluating Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US)], a British multinational retailer, which currently trades at 363p. Here are my thoughts:

1. Financial strength: Tesco is in solid financial position.  Net debt/operating cash flow is less than 2 times; net gearing is 50%; interest cover is an adequate 7.5 times; and free cash flow has averaged nearly £2bn per year over the last 3 years.

2. Profitability: Tesco has delivered outstanding growth for nearly two decades. However, with the continuing weakness in Europe and facing stiff competition at home, the company has struggled of late. In the last fiscal year, underlying profit before tax declined by 15% while underlying earnings per share fell by 14%. Forced to compete in price, the company’s margins have contracted from to 3.4% from 5.6% the previous year.

Also, international trading profit declined by 22%, due to the impact of regulatory changes in South Korea and impairment of businesses in Turkey, Poland and the Czech Republic.

3. Management: I believe the company’s new direction under Philip Clarke, which focuses on developing its “multichannel” footprint, strengthening its core UK business, and adopting a more prudent international growth strategy,  places the company in a better position moving forward.    

4. Long-term prospects: Tesco has fallen out of favour with investors recently after a rough 18 months where it was rocked by the horsemeat scandal, several quarters of declining market share and like-for-like sales, and write-offs of its Fresh and Easy US business and several UK properties of more than £1bn  and £804m, respectively.

However, despite the grim outlook, I believe Tesco’s competitive position remains solid. It is still the largest UK grocer with a market share of 30% –almost doubling that of its closest rival Wal-Mart’s ASDA. It also owns the UK’s widest store network with around 3,000 stores and the world’s largest and most profitable online supermarket, which reached a record-high revenue of over £3bn last year. In addition, it is the number one or two retailer for general merchandise in 8 out of 9 of its international markets.

Furthermore, to adapt to the rapidly changing retail environment, the company has announced new strategic objectives which include: a shift from traditional large-store formats to building its “multichannel” retail capabilities such as convenience and online retailing; focusing on its core UK operations to maintain its leading position — the company has invested around £1bn to overhaul its superstores; and adopting a more disciplined approach to international expansion, concentrating only on markets that could deliver strong investment returns. 

5. Valuation: With a market cap of £30bn, Tesco trades at a forward price-to-earnings (P/E) ratio of 11 -slightly below its 10-year median P/E of 13 and the industry average of 12– and a prospective dividend yield of 4%, twice covered.

My verdict on Tesco

Although recent results have been disappointing and with competition in the UK likely to remain competitive, I think the company still owns a distinct advantage with its scale and size. Also, its profitable international business –29% of the company’s profits come from outside the UK–  and established online presence could be a source of future growth opportunities.

Moreover, the company intends to tighten capital spending during the next few years –around 3.5% to 4% of revenue– which will add to its already strong cash flow. What’s more, shares are trading at an undemanding P/E of 12, a discount compared to its peers Wal-Mart and Carreouflour.        

So overall, I believe Tesco at 363p looks like a buy.

More FTSE opportunities

As well as Tesco, I am also positive on the FTSE shares highlighted in “8 Dividend Plays Held By Britain’s Super Investor“. This exclusive report reveals the favourite income stocks owned by Neil Woodford — the the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012..

The report, which explains the full investing logic behind Mr Woodford’s dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article. The Motley Fool owns shares in Tesco.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

More on Uncategorized

Light bulb with jester hat perched on top
Uncategorized

New look. Same Foolish investing.

Maybe you already noticed — things are looking a little different around here. At the top corner of our site,…

Read more »

Light bulb with jester hat perched on top
Uncategorized

We have some exciting news!

You could even say it’s 25 years in the making...

Read more »

Uncategorized

Tesco PLC Is Doing All The Right Things And I’m A Buyer

I’m a big fan of how Tesco PLC (LON: TSCO) is turning itself around and here’s why…

Read more »

Uncategorized

What’s Stopped Me From Buying Gulf Keystone Petroleum plc Today

Royston Wild considers the investment case for Gulf Keystone Petroleum plc (LON: GKP).

Read more »

Uncategorized

Dow Futures Fall Ahead Of Durable Goods Report

Stock index futures ahead of this morning's durable goods orders report indicate that the Dow Jones and S&P 500 may…

Read more »

Uncategorized

What’s Stopped Me From Buying BHP Billiton plc Today

Royston Wild considers the investment case for BHP Billiton plc (LON: BLT).

Read more »

Uncategorized

3 FTSE Shares Hitting New Highs: National Express Group PLC, Brammer plc and Hilton Food Group plc

National Express Group PLC (LSE: NEX), Brammer plc (LON: BRAM) and Hilton Food Group plc (LON: HFG) set new records.

Read more »

Uncategorized

Should I Buy Legal & General Group Plc?

Legal & General Group plc (LON: LGEN) has seen its share price rise 50% in the last 12 months, Harvey…

Read more »