Can Tesco PLC Make £5 Billion Profit?

Will Tesco PLC (LON: TSCO) be able to drive profits higher?

| 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

Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.

Today I’m looking at Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) to ascertain if it can make £5bn in profit.

Have we been here before?

A great place to start assessing whether or not Tesco can make £5bn in profit is to look at the company’s historic performance. Unfortunately, it would appear that Tesco has never been able to make £5bn in profit and it would appear as if the company is going to struggle to do so in the near-term. Indeed, due to the company’s terrible performance during its 2013 financial year, even after excluding extraordinary items, Tesco’s net income has slumped 35% over the past five years.

 That being said, excluding 2013, Tesco’s performance from 2009 to 2012 was extremely impressive. For example, over this period the company’s revenue increased 20% and net income, excluding extraordinary items jumped 48%. With net income expanding faster than sales, this implies that Tesco’s profit margins are improving and the company is not sacrificing profit for sales.

But what about the future?

Tesco’s future outlook is key here, as although the company put in a strong performance during the four years to 2012, the company has been running into trouble during the past year or so.  However, City analysts expect Tesco’s pre-tax profit to rise back up to £3.1bn for 2014, more than 50% higher than the pre-tax profit of just under £2bn reported for 2013.

Nevertheless, after 2014 analysts expect Tesco’s pre-tax profit to remain almost static for the next three years as the company tries to improve sales figures in an increasingly tough retail environment. Further, there is talk from some analysts that Tesco could start an aggressive price-war here in the UK by slashing its profit margin in half, to drive sales. Of course, this would further inhibit the company’s ability hit my profit target.

What’s more, Tesco’s net profit margin has averaged 3.2% per annum for the last five years, implying that unless the company can double or even triple its net profit margin, Tesco’s would have to make sales of more than £156bn per annum to make a profit of £5bn . To put that into some perspective, the whole UK grocery market was worth £169.7bn during 2013.

Foolish summary

So overall, I feel that Tesco cannot make £5bn profit. 

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 owns shares in Tesco. The Motley Fool owns shares in Tesco.

More on Investing Articles

Investing Articles

Should I buy more Rolls-Royce shares near 500p?

This investor is wondering whether to buy more Rolls-Royce shares this summer or to just stick with those he already…

Read more »

Investing Articles

After its big fall, is the National Grid share price dirt cheap now?

The National Grid share price fell sharply in reponse to new rights issue plans. But is it an even better…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Starting in June, I’d invest £1,000 a month to aim for a £102,000 second income in retirement

This author highlights a less well-known FTSE 100 stock that could help his portfolio generate a very big second income…

Read more »

Investing Articles

Down 47% in 5 years, is the IAG share price due a bounce?

Many companies in the travel sector have seen fierce rallies since 2020. But with the IAG share price still down…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Despite its drop, I reckon this is one of the best FTSE 100 stocks to buy and hold!

The FTSE 100 has been climbing in 2024 but this favourite of our writer's has been falling. Despite this, she’s…

Read more »

Investing Articles

AI stocks vs EV shares; which is the best sector for me to invest in?

Jon Smith considers the recent rally in AI stocks and weighs up whether to allocate more money there versus EV…

Read more »

A graph made of neon tubes in a room
Investing Articles

Do Greggs shares have even more growth ahead?

Greggs shares have seen some solid growth in the last few months, as the economy shows positive signs. But is…

Read more »

Investing For Beginners

How I’d aim to grow my Stocks & Shares ISA from £20k to £1m

Jon Smith explains how diversification and focusing on sectors for the future can help grow his Stocks and Shares ISA.

Read more »