The Tesco (LSE: TSCO) share price isn’t in the bargain basement territory of some other FTSE 100 shares following the recent market fall. But the shares do still look undervalued to me.
A defensive FTSE 100 share
One of the reasons Tesco has done comparatively well during the recent market downturn is that it’s considered a safer investment. Otherwise known as a defensive share. These are shares that should continue to do well even when the economy takes a downward turn, as it currently has done. People will still buy food and therefore supermarkets should be less affected.
Indeed, because so many people are working from home, and some have been panic-buying, supermarket sales in March rocketed.
That’s not to say the supermarkets don’t face challenges with supply changes and staffing levels. But the virus isn’t the threat to their survival that it might be for a small housebuilder or engineer for example.
Across the board, you can see defensive shares did well in March, or at least, better than most other shares. Fast-moving consumer goods companies also did relatively well, as did car insurers.
What could push the Tesco share price higher?
I think there are a number of factors that could help the share price rise over the coming months and years. The group is becoming leaner. It’s selling its Asian business and the £8bn deal will strengthen its balance sheet.
And after recent declines, Tesco’s share price is trading at a price-to-earnings (P/E) ratio of 13.4. That’s compared to its five-year average of around 20.
Booker, the wholesale part of the business, is likely to be hit harder by the current trading environment. Before the recent crisis though, it had a faster rate of growth. Longer term, once coronavirus passes, I think it has good growth potential for the group and helps diversify Tesco’s income.
By concentrating more on the UK, there are opportunities for Tesco to improve its margins and protect its market-leading position better. This is because management’s attention will be more focused on the UK. It may also help management turn around the currently underperforming central Europe business.
New CEO Ken Murphy will inherit a strong business and he could help refresh the strategy. This may also boost the share price. Now the group has reduced debt and expanded into wholesale, he may seek out exciting new opportunities for growth to build on the vast improvements that have been made so far at the grocer.
The defensive nature of the shares should mean they do well in the short term. That, combined with the new CEO arriving, plus the long-term potential for its wholesale operation, its increased focus on the UK and room for improvement in its Central European business, mean I think the shares could go a lot higher. I’d go as far as to suggest they are massively undervalued right now.
