Tesco (LSE: TSCO) is now the largest single holding in my portfolio. As the supermarket firm’s share price has fallen over the last year, I’ve bought more, culminating in a recent top up at less than 300p.
Why am I such a bull on Tesco? In my view, there are five reasons why Tesco is a screaming buy at the moment.
1. Fundamental attraction
When you buy shares in a business, you are effectively buying a share of future profit growth (rising share price) and cash flow (dividends).
If you buy shares when they are unusually cheap, as I believe Tesco is, you improve the odds of a profitable outcome. Tesco currently trades on a forecast P/E of 11.5 and offers a prospective yield of 4.7%. I reckon that unusually cheap.
2. Profitability
Tesco has some of the fattest profit margins in the supermarket sector.
This gives it more headroom than its competitors when it comes to cutting prices and clawing back customers from Aldi and Lidl — and my experience as a shopper suggests that’s exactly what’s happening.
3. Not just food
Like its peers, Tesco is pulling back from opening any more giant-sized hyperstores, but that doesn’t mean it’s planning to sell fewer non-food ranges. Instead, the firm will use its strong brand and the sophisticated customer knowledge provided by its Clubcard scheme to sell more online.
The potential for seamless integration between online, in-store, delivery, collection and banking services is considerable, and Tesco could even compete with Amazon.com in some areas.
4. Property magnate
According to Tesco’s recent results, its property portfolio is currently valued at £25bn.
Tesco’s enterprise value (market cap plus net debt) is currently £32bn. This means that when the value of its property portfolio is subtracted, Tesco’s entire retail business is effectively being valued at just £7bn! Surely that’s peanuts, for a company that made a £2.6bn operating profit last year?
5. Asian tiger
Tesco isn’t just about the UK: the firm sold £11bn of goods in Asia last year, with a trading profit margin of 6.7% — significantly higher than the 5.0% it reported in the UK.
I believe Tesco’s Asian businesses offer great long-term growth potential: in countries such as Thailand and Korea, today’s younger generations are more affluent, better educated, and more westernised than their parents. These potential customers have grown up with modern, Western-style retail and ecommerce, and as they get older, they’ll want more of it.
