Is the Tesco share price heading for 500p?

Could Tesco plc (LON: TSCO) rise past its previous all-time high?

| 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.

The highest share price at which Tesco (LSE: TSCO) has ever traded is around 487p. This was achieved in late 2007, with the retailer experiencing a decline in its valuation in the following years. A bloated structure and a weak performance of the UK economy were key reasons behind this. With the stock trading as low as 143p in 2015, there has been a significant deterioration in the value of the UK’s largest retailer.

Now though, the company is in the midst of a resurgence which has seen its share price soar to 260p at the present time. Is more growth ahead? Or should investors look elsewhere in the retail sector?

Turnaround

Under its current management team, Tesco is becoming a very different entity to that of previous years. In the past, it had sought to expand its operations into new areas, as well as through international channels. While this had created a larger business, substantial parts of it were inefficient and lacked profit growth potential. In other words, the company had become bloated and lacked direction.

Today, the company is focused on its core operation of being a UK-oriented grocery business. It has invested heavily in its products, as well as in areas such as customer service and the layout of its stores. This has helped it to compete in a crowded marketplace, while a more efficient supply chain and the disposal of non-core assets are set to boost its margins over the next few years.

With Tesco also having purchased cash-and-carry company Booker, it seems to be in an increasingly strong position versus peers. It is expected to report a rise in earnings of 18% this year, followed by further growth of 20% next year. Since it trades on a price-to-earnings growth (PEG) ratio of 0.8 and seems to have a sound strategy, significant share price growth could be ahead.

Improving performance

Also offering an improving outlook in the retail sector is Sports Direct (LSE: SPD). The company reported an improvement in its profitability last week after what has been a challenging period for the business. UK sales are still under pressure, while the company’s reputation is only likely to improve at a relatively slow pace.

Looking ahead though, Sports Direct does appear to have that improving outlook. The company’s bottom line is forecast to increase by 13% this year, followed by further growth of 16% next year. And despite rising by around 30% in the last 12 months, its shares have a PEG ratio of 1.4 at the present time. This suggests that investors are including a margin of safety in its valuation, with mixed past performance being the possible reason.

Clearly, the outlook for the wider UK retail sector remains tough. Sales performance across the industry could come under pressure if consumer confidence remains low. But with what seems to be a solid strategy and recovery potential, Sports Direct could be a worthwhile buy for the long run.

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.

Peter Stephens owns shares of Tesco. 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.

More on Investing Articles

Investing Articles

How much does an investor need in a Stocks and Shares ISA to earn £1,000 a month in passive income?

A Stocks and Shares ISA's a valuable asset for investors. Not having to pay dividend tax can be a big…

Read more »

Investing Articles

9% dividend yield! Could buying this FTSE 250 stock earn me massive passive income?

Assura looks like an outstanding stock for dividend investors to consider. But is the 9% dividend yield the passive income…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Why I think this month could be critical for the Lloyds share price!

Our writer explains why he thinks the bank's 2024 results will have a significant impact on the short-term direction of…

Read more »

British Pennies on a Pound Note
Investing Articles

This former penny share has soared 168%. Is the best yet to come?

When Christopher Ruane saw a penny share as a potential bargain last year, he was spot on. So having not…

Read more »

Mature couple at the beach
Investing Articles

£20k in an ISA? Here’s how it could generate £1 of passive income every hour — forever

With a long-term approach, Christopher Ruane explains how an investor could aim to earn a pound per hour in passive…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

FTSE shares: overpriced or still a bargain?

Christopher Ruane reckons a storming FTSE 100 performance of late doesn't tell us much about whether there are still possible…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Would an investor have made money investing £2k in NIO stock 5 years ago?

Our writer looks at how NIO stock has performed over recent years and weighs the bull and bear cases as…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

5 steps to start buying shares with £5 a day

In a handful of steps, our writer explains how someone new to the stock market could start buying shares for…

Read more »