Today I am outlining why Tesco (LSE: TSCO) could be considered a terrific stock for growth hunters.
Further earnings woe in sight
After shocking the market with its first profit warning for decades back in early 2012, the march of budget chains like Lidl as well as premium outlets like Waitrose — combined with the crippling effect of mammoth discounting to tempt back sho
ppers — has seen Tesco punch heavy earnings growth during two years.
Against this backdrop Tesco has seen its share price slide relentlessly lower as investors have jumped ship, and the supermarket has conceded almost 40% during the past year.
And City brokers do not believe that any sort of earnings renaissance is in sight, and a gargantuan 30% earnings drop for the year concluding February 2015 is pencilled in, to 22.2p per share. This is expected to be followed with a further 6% dip in the following 12-month period, to 20.2p.
… but changing of the guard bodes well
Still, many believe that the replacement of chief executive Philip Clarke during the summer with Unilever’s Dave Lewis may bring an input of fresh ideas to revive its ailing fortunes — Tesco cannot rely on a damaging price war to fight off its rivals, after all. And the new man’s expertise in cracking foreign markets, particularly those of Asia, could also prove invaluable to the firm’s recent drive into new territories such as China and India.
Meanwhile, Tesco also has a number of other aces up its sleeve to get profits moving again. The business continues to deliver strong revenue growth at its online division, boosted by a number of innovations such as improvements to its delivery service and the successful roll-out of its Hudl tablet. And the firm is also investing heavily in the white-hot convenience sector to mitigate lower footfall across its megastores.
Undoubtedly Tesco looks on course for further earnings hurt during the next couple of years as the new leadership gets to grips with an increasingly-difficult trading environment. Still, for many who believe the supermarket has the might to get earnings back on track eventually, today’s lowly share price could provide the perfect entry point.
Indeed, the firm currently changes hands on a low P/E multiple of just 10.3 for this year, just outside the value benchmark of 10 and which remains relatively low at just 11.3 for fiscal 2016. Although Tesco still has a huge fight on its hands to retain its lustre at the top of the British supermarket pile, for risk-tolerant investors the business could prove to be a canny long-term growth pick.
