Can Tesco PLC Keep Growing?

Tesco PLC (LON: TSCO) is pursuing growth internationally, but not as doggedly as in the past.

| 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.

One of the biggest criticisms of Tesco’s (LSE: TSCO) (NASDAQOTH: TSCDY.US) recent leadership is that the grocer took its eye of the ball in the domestic market. While pursuing growth and expansion abroad, market share on its home turf declined, and it issued a shock profit warning in January 2012.

Tesco is now in a weaker position than at that time, so you might find it surprising that the company just announced plans to enter the Indian grocery market.

The FTSE 100 blue-chip has agreed a joint venture agreement with a subsidiary of India’s Tata Group for £90m. Tesco becomes the first foreign grocer to enter the country’s £300bn retail sector.

What went wrong before?

Tesco offloaded its loss making US venture Fresh & Easy last September at a total cost of £2bn. The chief executive of the struggling operation is no longer with Tesco, claiming shortly after that he wished he’d been given more time.

TescoFar from being content with simply being a highly successful UK retailer, the goal was to become a global player — in concert with ex-boss Terry Leahy’s vision. No British retailer seeking growth in America — J Sainsbury, Marks and Spencer, Dixons — has succeeded. Tesco would not be the first.

True, the timing was bad — the launch coincided with the sub-prime mortgage scandal, and subsequent recession — but the persistence in not cutting losses sooner aggrieved investors.

Why India could be lucrative

The US is the biggest retail market in the world, and it was an expensive nut to fail to crack. India, on the other hand, is more of a long-term play: by 2027 India is expected to have the world’s largest middle class population. 

Emerging market stocks aren’t in vogue at present, however. In January, rising concerns about economic and political risk led to the worst emerging market sell-off since 2001. And it’s true, funds specialising in some of the  most popular emerging markets, like Brazil, Russia and India, have lost on average between 15% to 30% in the last year.

But Tesco’s £90m expense to enter India seems perfectly measured. It will likely be many years before the joint venture has any material impact on sales, but longer term could be prove immensely lucrative. It seems a small price to pay for exposure to a rapidly growing economy. 

Would I buy Tesco?

So, might now be a good time to buy Tesco? At 294p, the shares are trading on a forward P/E of 10, which to me looks cheap. With a dominant market position, and a price-war looming, Tesco is well placed to rough-up its rivals this year. Unlike rival Sainsbury’s, Tesco has the profit margins — 5.2% — to sharply cut prices and drive the most sales.

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.

Mark does not own shares in Tesco. The Motley Fool owns shares in Tesco.

More on Company Comment

Hand of person putting wood cube block with word VALUE on wooden table
Company Comment

Value has been building behind the Diageo share price

Despite the business growing, the Diageo share price first reached its current level just over 19 months ago and hasn't…

Read more »

Older couple walking in park
Investing Articles

5 stocks to buy for high and rising dividend income

I can see a host of shares to buy on the FTSE 100 offering me exceptional levels of income. Here…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I don’t care if FTSE 100 shares fall further, I’m buying them today

I'm happy to go shopping for FTSE 100 shares today, even though I accept that they could have further to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Rolls-Royce shares are down 18% in a month and I’m finally going to buy them

Investors who bought Rolls-Royce shares have been repeatedly disappointed, but I'm willing to take a chance on them before they…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

How I’d invest £10k in a Stocks and Shares ISA today

Now looks like a good time to buy cheap FTSE 100 shares inside a Stocks and Shares ISA. These are…

Read more »

Black father holding daughter in a field of cows
Investing Articles

Today’s financial crisis is the perfect moment to buy cheap shares

I'm building a portfolio of FTSE 100 stocks by purchasing cheap shares whenever I see an opportunity. There's a good…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

I’d buy Tesco shares in October to bag their 5.4% yield 

Tesco shares have fallen lately but I think this makes them attractively valued for a dividend stock I would aim…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I would do anything to hold Diageo in my portfolio (but I won’t do that)

Diageo is one of my favourite stocks on the entire FTSE 100 and I'd love to hold it, but one…

Read more »