As politicians continue to squabble over the details of our forthcoming departure from the EU, the FTSE 100 — many of whose blue-chip constituents benefit from a fall in sterling due to their international exposure — is on its way back to test the all-time highs hit towards the end of May.
Seen over the course of a year, however, the FTSE 100’s performance looks decidedly average. Indeed, since last June, the index has gained a little under 5%. Contrast that with grocery giant Tesco‘s (LSE: TSCO) near-50% rise and you have yet another example of how buying slices of individual companies can be a far more profitable (albeit riskier) endeavour for those investors willing to do their homework rather than simply holding an index-tracker or exchange-traded fund.
What’s more, today’s encouraging Q1 numbers from the newly-headquartered £24bn cap — and the market’s initial reaction to them — suggest this sort of performance might just continue.
The Booker effect
Group like-for-like sales rose 1.8% over the 13 weeks to 26 May with the company seeing an even better rise (3.5%) in the UK and Republic of Ireland, despite the adverse weather experienced in March. Underlining how far Tesco has come under the direction of CEO Dave Lewis, this increase represented the tenth consecutive quarter of growth achieved by the grocery giant.
Overseas, Tesco achieved a 1% rise in like-for-like fresh food sales in Central Europe although overall like-for-like sales were 1% lower as a result of regulatory changes. It was a similar story in Asia with fresh food sales rising 4.5% despite a 9% dip in general like-for-like sales.
Over the reporting period, the retailer continued its relaunch of over 10,000 of its own products and said it would close Tesco Direct in its desire to develop “a more sustainable non-food offer“. With regard to the latter, the range of products available to buy on Tesco.com will now be increased with the intention of “creating a simpler online experience“. Given the importance of making shopping as fuss-free as possible in a highly competitive industry, this seems a smart move.
As encouraging as all this will be to existing owners, however, arguably the most positive bit of news in today’s statement related to Booker.
Having completed its £4m merger with Tesco in March, the wholesaler achieved like-for-like sales growth of 14.3% in Q1. A total of 3,000 of its products are now fulfilled from the FTSE 100 giant’s Magor distribution centre with Tesco also extending its two-store trial of Booker’s 30 most popular lines to over 50 more stores during the quarter.
Can the shares keep going?
Based on today’s numbers (and the fact that its stock climbed a couple of percent in early trading), I remain confident that Tesco’s recent momentum — and its outperformance of the FTSE 100 — will continue for some time to come.
A forecast price-to-earnings (P/E) ratio of 18 makes the shares more expensive compared to peer Sainsbury (15) and they come with a lower, albeit better-covered, yield (2.1% vs 3.4%). But the great start to its relationship with Booker and the growth opportunities the merger offers suggests that the likely deal between two of Tesco’s biggest rivals shouldn’t necessarily mean that investors should lose faith. Indeed, with a PEG ratio of just 0.88 based on the expected earnings per share increase of 28% in the current year, Tesco’s shares still look reasonably valued in my opinion.
