I’ve become increasingly bullish on Tesco (LSE: TSCO) in 2020, and it’s largely due to a development from the Covid-19 pandemic. I’m talking of the shift to online groceries shopping and home delivery, and it’s been huge. We can see the effect on the Tesco share price, which has remained reasonably robust, so far, this year.
Sure, Tesco shares are down 15% since the start of 2020, which would be a catastrophe in normal times. But, during a stock market crash when the FTSE 100 has slumped 22%, I’d call it comfortably resilient.
Online orders now account for around 16% of Tesco’s sales, up from 9% at the beginning of the year. Estimates put the total value of online sales at around £5.5bn for 2020, from around £3.3bn in 2019. That’s an impressive jump, but two aspects of it stand out for me.
First, it’s still only a small proportion of total sales, and there’s tremendous potential growth in online shopping still to come. And that’s got to be good for the Tesco share price.
Secondly, I’m convinced the shift in shopping practice is permanent. From talking to consumers, I’m seeing the slow take-up so far as being through inertia rather than anything. Now people are trying home delivery, they like it, and they’re sticking with it.
Online Aldi
Prior to the expansion of online shopping, I saw Lidl and Aldi as the biggest threats to the Tesco share price. Both the super discounters had been expanding rapidly while Tesco and the rest were consolidating. But they’re nowhere on the online shopping front. That’s about to change.
Aldi is looking at various automated shopping options. One possibility is a Deliveroo rapid delivery service. But the company has already been trialling a new click and collect service, and that’s set to expand to 15 stores.
You can order online, but you still have to drive to the store and have your shopping brought out to your car. That’s effective from a pandemic distancing standpoint. But I really can’t see it as very attractive compared to the convenience of home delivery — especially as we head into the colder winter months.
Tesco share price safe?
Despite this development, I’m still bullish about the Tesco share price. Aldi (and Lidl if it follows) might indeed make inroads into the online shopping arena. But it will take quite some time to scale up from trials to anything approaching Tesco’s volumes.
And, in this particular battle, the roles have been reversed. Now Tesco is the one surging ahead, and the discounters are playing catch-up.
The current year is still going to be a relatively hard one. But even with a forecast EPS fall of around 25%, the Tesco share price suggests a P/E of around 16. I find that undemanding, especially with a predicted dividend yield of 3.7%.
Earnings should pick up again next year, and I’m less worried about the competition than I used to be. I’d buy Tesco.
