Is There Still Time To Buy Tesco PLC?

Can Tesco PLC (LON: TSCO) move higher, or are the company’s shares overvalued?

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Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish if there is still time for investors to buy in.

Today I’m looking at Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) to ascertain if its share price has the potential to push higher.

Current market sentiment

The best place to start assessing whether or not Tesco’s share price has the potential to push higher, is to take a look at the market’s current opinion towards the company.

Unfortunately at present, it would appear that the market is somewhat doubtful of Tesco’s future plans, as the company’s UK sales continue to slide and growth overseas is illusive.

Still, there are glimmers of hope for Tesco and the company’s management remain upbeat about the future. For example, the company’s new ‘Click and Collect’ service has proven to be very popular with customers, taking £1bn in sales during the five days before Christmas. The company’s clothing range also proved popular over Christmas with sales jumping 70%.

Upcoming catalysts

There are two upcoming catalysts for Tesco in the near future. Firstly, the company will report full-year 2013 results on the 16th of April, within which management should provide an update on the company’s strategy.

Secondly, there are now concerns that Tesco is about to get caught up in a cut-throat price war between its competitors here within the UK. A price war threatens to erode Tesco’s already razor thin profit margins even further, not good news for investors as profits would collapse.

On the other hand, Tesco’s full-year results could contain some positive news for investors, including results from the company’s overseas online grocery shopping business, which has been rolled out within 50 cities worldwide. There should also be an update on management’s, ‘Build a Better Tesco’ campaign. 

Valuation

Unfortunately, after recent disappointments Tesco’s shares now look extremely cheap when compared to both the company’s peers here within the UK and larger, international peers.

In particular, Tesco’s shares currently trade at a historic P/E of 10, while peers Morrisons and Sainsbury’s trade at historic P/E’s of 10 and 11respectively — as the largest grocer within the UK, Tesco should trade at a premium to smaller peers.

In addition, Tesco’s international peers, Carrefour and Costco trade at forward P/Es of 18 and 24respectively, compared to Tesco’s forward P/E of 9.8. Tesco’s sales, in dollar terms, are larger than those of Costco so there is no reason why the two companies should not trade at a similar valuation.  

Foolish summary

So overall, based on the company’s current valuation, I feel that there is still time to buy Tesco. 

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 and Morrisons. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons. 

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