Should you buy, sell or hold Tesco plc, Associated British Foods plc and Fuller, Smith & Turner plc?

G A Chester assesses the prospects for Tesco plc (LON:TSCO), Associated British Foods plc (LON:ABF) and Fuller, Smith & Turner plc (LON:FSTA).

| 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.

Dave Lewis warned that there would be no quick turnaround when he got the Tesco (LSE: TSCO) chief executive gig at the backend of 2014. A honeymoon period saw the shares rise to 250p, but the market is ever impatient and they’re currently languishing nearer 150p.

Undervalued on a P/E of 50?

Aside from the high-profile £4.2bn sale of the company’s Homeplus business in Korea, there has been little to make investors sit up and take notice. That goes for news this morning that it is to sell its business in Turkey and Giraffe restaurant chain. The deal in Turkey will produce cash proceeds of around £30m, and a reduction of around £110m in total indebtedness. Big deal, huh?

The thing is, all the fairly low-key things Lewis has been doing — aisle-by-aisle, literally and metaphorically — add up to quite a lot. It’s all about the first principle: “retail is detail”. While a stretched balance sheet and depressed cash flows have been constraints, incremental improvements towards a sustainable business are coming through, if masked somewhat by a challenging, deflationary and uncertain market.

I believe Lewis’s careful husbandry will produce long-term shareholder value. I rate the shares a buy, based on a view that the current price-to-earnings (P/E) ratio of around 50 is meaningless, and that the share price undervalues Tesco’s revenue and margin potential a few years down the line.

Long growth runway

The retail division of £23bn conglomerate Associated British Foods (LSE: ABF) continues to grow at a rate of knots. That division is, of course, Primark. The FTSE 100 group’s other divisions — grocery, ingredients, sugar and agriculture — are valuable and profitable businesses in their own right, but Primark is the turbo engine and currently generates over 60% of ABF’s profit.

Primark’s format is proving as popular in Europe as at home, while the company said in it’s latest results: “Early trading at our two stores in the US has been encouraging, with very positive customer feedback”.

Primark has a long “growth runway”, and for this reason I believe ABF is well worth buying on an admittedly high-looking P/E of 28.5 at share price of 2,910p (20% down from a 3,600p high in December).

Outstanding seven-decade record

Pubs group Fuller, Smith & Turner (LSE FSTA) is another high-quality, thriving business. Again, while the P/E doesn’t exactly scream “cheap” — being 18.4 at a share price of 1,075p — the shares are an attractive buy in my view.

In its annual results, released this morning, the company reported revenue growth of 9%, with pre-tax profit up 12% and earnings per share up 13%. The board also hiked the dividend by 8% and noted: “Our dividend has demonstrated continued progressive growth for over seven decades”.

Despite the results being a bit ahead of analyst consensus expectations, the shares are little-moved in morning trading. Enthusiasm may have been dampened by less impressive numbers for the first 10 weeks of the company’s new financial year, but as the dividend history suggests, this is a company to back for the long-term.

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.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 670% in 2 years! This former penny share is skyrocketing on SpaceX contracts

Shares of Filtronic (LON:FTC) were soaring to multi-year highs today after another contract win with SpaceX. Should I buy this…

Read more »

Investing Articles

Why is the Greatland Gold (GGP) share price up 10% today?

Our writer looks at the reasons why the Greatland Gold (GGP) share price is the AIM 100’s best performer today.

Read more »

Passive income text with pin graph chart on business table
Investing Articles

What do I need for a passive income of £100k a year?

How much would I need to invest to collect a very healthy yearly passive income on my retirement? Surprisingly, the…

Read more »

US Stock

£2k invested in Nvidia stock 2 years ago is now worth this boggling amount…

Jon Smith details how much unrealised profit an investor would have from buying Nvidia stock but is cautious about what…

Read more »

Investing Articles

2 value stocks that still look cheap despite the FTSE rally!

Harvey Jones picks out two UK value stocks that still look nicely priced even as the UK index climbs. He…

Read more »

Dividend Shares

I asked ChatGPT to build the perfect passive income portfolio and here’s the result

Jon Smith turns to the world of AI to try and find out whether ChatGPT could build an investor a…

Read more »

Investing Articles

£20,000 to invest? Here’s how the FTSE 100 could deliver a £2,040 passive income

Here are two ways that investors with a lump sum to spend could target a large passive income with FTSE…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Here’s how someone could start investing in 2025 with just £1,000

Planning to start investing in 2025? This writer highlights two very different stocks that might be worth considering for a…

Read more »