Why I feel FTSE 100 stock Tesco’s share price could plunge

Royston Wild explains why FTSE 100 (INDEXFTSE: UKX) giant Tesco plc (LON: TSCO) still carries far too much risk today.

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Despite the growing influence of the German discounters sales in the UK grocery market, sales at Tesco (LSE: TSCO) continues to steadily improve.

This resilience has helped the FTSE 100 retailer’s share price ascend 30% over the past 12 months, and Tesco is currently dealing at levels not seen since spring 2015.

Now the Hertfordshire business may have sprung back strongly in the face of tough market conditions, and for this Tesco — and more specifically chief executive and architect of this turnaround Dave Lewis — deserves all of the accolades.

But I for one refuse to get carried away and won’t be ploughing my own cash into the supermarket any time soon.

Supermarket sweeps lower?

Tesco sprang to fresh multi-year peaks earlier in April upon the release of pretty impressive sales numbers. Like-for-like revenues rose 2.2% in the 12 months to February 2018, a result which, assisted by a £594m boost from cost savings, helped supercharge pre-tax profit to £1.3bn from £145m in the prior year.

In a sign that it is confident of making further progress Tesco decided to pay a 2p final dividend, taking the resumed full-year payout to 3p.

But scratch a little deeper and suddenly Tesco’s investment case looks a little more fragile. Sure, sales may be picking up but this is mainly on the back of seized custom from the company’s Big Four rivals.

Indeed, the elephant-sized problem still hanging over the Footsie business is the rising might of Aldi and Lidl. Sales at these chains advanced 10.7% and 10.3% respectively in the 12 weeks to March 25, latest Kantar Worldpanel numbers showed. The firms are expanding to harness the exciting demand for their goods too, Aldi this month announcing plans to invest a further £57m to expand its Warwickshire head office to support its store rollout plan. And this threatens to put Tesco’s recovery increasingly under the cosh.

City analysts may be expecting extra earnings growth of 16% and 21% for fiscal 2019 and 2020 respectively. But I feel that the long-term picture remains extremely muddy and fraught with risk. And with Tesco boasting a far-from-compelling valuation, a forward P/E ratio of 17.2 times, I don’t think the supermarket is a particularly attractive pick right now.

Green machine

I would much rather splash the cash on another recovery play today: Greencore Group (LSE: GNC).

Now City analysts are expecting the convenience food giant’s earnings to drop 5% year-on-year in the period ending September 2018. However, it is expected to bounce back with a 9% profits advance in fiscal 2019. And I would consider a forward P/E ratio of 11 times as an attractive level upon which to buy into the business.

My optimism may seem a little misplaced particularly in the wake of March’s shock profit warning. Whilst conditions are tough in the US right now, however, the vast investment Greencore has made on the other side of the Pond still promises to deliver the sort of growth that eventually dwarfs that of its original UK operations.

Of course, further turbulence cannot be ruled out given Greencore’s current struggles. Having said that, the FTSE 250 firm’s low valuation should provide some protection against another shocking share price fall.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Greencore. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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