The Tesco share price: is it the biggest investment trap on the FTSE 100?

Royston Wild considers whether FTSE 100 (INDEXFTSE: UKX) stock Tesco plc (LON: TSCO) threatens to lose its shareholders a fortune.

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As someone who has covered Tesco (LSE: TSCO) for many a year now, I’m afraid its appeal with share investor remains something which escapes me.

A quick glance at analyst expectations, though, could prompt many to ask what my beef is right now. Not only is Britain’s biggest supermarket predicted to record double-digit earnings increases through the next fiscal years, but at current prices it can also be considered quite a bargain in respect of its anticipated growth trajectory, as illustrated by a forward P/E ratio of 13.8 times.

Tesco also can’t be considered too stingy when it comes to dividends, the business currently sporting yields of 3.6% and 3.8% for this year and next.

Low sales growth

So why am I such a stick in the mud? I don’t think I’m that hard to please but, while the rest of the market has been piling into Tesco since the start of 2019 (its share price is up around 25% year to date as a result), I remain concerned by its lack of serious sales growth.

The FTSE 100 firm reminded me of this last week when it declared like-for-like sales rose just 0.8% year-on-year in the 13 weeks to May 29, with sales in its core UK and Irish divisions barely registering any uptick at all (+0.4%).

I don’t care that Tesco apparently “outperformed in both sales and volume terms” in the period. The grocer is having to do a hell of a lot of paddling to generate any sort of sales growth at all, efforts which require shocking amounts of investment through product range improvements and price discounting.

To its credit, Tesco’s checkouts are performing better in tough market conditions than its big-cap rivals Sainsburys and Morrisons. But that’s hardly a ringing endorsement for one to invest today.  Ultimately, those measures to keep pulling customers through its doors cast a cloud over the company’s already notoriously wafer-thin profit margins and its aim to keep operating margins within its targeted range of 3.5% and 4%.

Stand by for a correction

It’s not my intention to hate Tesco, and I commend boss Dave Lewis for the huge strides he has made in improving products lines, boosting the customer experience and cutting the cost base. My point is, though, there’s only so much Tesco can expect to achieve as the competition intensifies.

Lidl has announced a £500m investment plan for London in recent days, while Amazon and Morrisons have declared plans to expand their same-day delivery services. Little surprise, then, that Tesco’s like-for-like sales on the British Isles — which dropped from 3.8% in the first half of the last fiscal year to 1.9% in the latter half — continue to decelerate alarmingly.

So is the supermarket the biggest trap on the Footsie, then? Well critics of British American Tobacco, for instance, may suggest not, given the massive decline in global cigarette demand, while Lloyds or RBS might be hugely disliked because of the murky outlook for the British economy.

What I would say, though, is those huge share price gains at Tesco in 2019 leave it in danger of a sharp correction should — as I expect — sales growth remains under pressure. For this reason, I’m avoiding it at all costs.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Lloyds Banking Group and 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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