Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) is a company that I’m thinking about increasing my stake in, mainly because I feel it is one of the best recovery stories around at the moment.
Of course, I accept that the company is going through a tough time and that it may take quite a while for it to come good. The key thing for me, though, is that I believe it will make a very strong comeback and will return to being viewed as a highly attractive retailer by the stock market.
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Indeed, the company’s management strategy is an area that has come under close scrutiny in recent years. In my view, Tesco has made mistakes, most obviously in the USA with its Fresh & Easy brand. However, it has shifted from being on the back foot to being on the front foot, with stores being freshened up, new marketing campaigns (such as Brand Match) being launched and a renewed focus on maintaining customers via generous reward programmes.
Furthermore, I feel that diversifying the Tesco brand is the best way to generate future growth, so the release of the Hudl (the Tesco tablet) is a positive step in my opinion. Of course, some ideas are not going to work, but I think the lesson taught by the difficulties over the last few years is that Tesco should try new ideas out on a smaller scale and not risk vast losses should things not work out as planned.
Certainly, management need to come up with new ideas to achieve top-line growth and it seems as though a focus on new products that provide the ability to cross-sell (as the Hudl does) via the Clubcard rewards programme is a logical move for the company.
In addition to management strategy being sound, I’m also considering increasing my stake in Tesco because its shares trade on a low price to earnings (P/E) ratio. Indeed, Tesco’s P/E is just 11.5 which, on an absolute basis, is cheap.
However, when viewed relative to the wider stock market and to the food retail sector, Tesco looks even better value. The FTSE 100 trades on a P/E of 15.5, while the food retail sector (to which Tesco belongs) has an average P/E of 13.7. Given the quality of the company and its clear recovery prospects, I think such a large discount is unwarranted and I would expect it to narrow over the medium to long term.