FTSE 100 watch: why I’m not bowled over by the cheap Tesco share price!
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There are still plenty of top-quality FTSE 100 shares trading to cheaply following the 2020 stock market crash. However, I won’t be investing in Tesco (LSE: TSCO), despite its cheap share price.
The UK’s biggest supermarket has two significant feathers in its cap in these uncertain times. Food retailing is just about one of the most robust sectors when the broader economy struggles. And this particular UK supermarket share sits at the top of the tree with a whopping 27.3% take of the British market (according to Kantar Worldpanel).
This FTSE 100 operator is also thriving thanks to its extensive online shopping operations. Tesco delivered a staggering 7m grocery orders over the Christmas period alone. As anyone who’s tried to book a delivery slot with Tesco knows, demand for its Internet-based services remains rock-solid as Covid-19 lockdowns remain in place.
I think it’s probable that this UK share’s e-commerce proposition will keep going from strength to strength too. Sales at Tesco.com will benefit from the broader rise in Internet shopping activity from both new and existing users, I reckon. And the grocery sector in particular has plenty of room for growth. Kantar says that online now makes up for just 12% of all grocery sales.
Tesco’s competition concerns
So why on earth won’t I be investing in Tesco, you ask? Well the small matter of increasingly bloody competition makes me worry about the FTSE 100 firm’s profits. The soaring popularity of German discounters Aldi and Lidl have put huge strain on the established operators’s wafer-thin margins. And things threaten to get worse as the low-cost disruptors expand their operations.
Take Lidl, for example. It saw sales rocket 17.9% in the four weeks to 27 December, sprinting past the festive performances of Britain’s so-called Big 4 supermarkets. Lidl now has 800 supermarkets running the length and breadth of the country. And it plans to have 1,000 shops running by 2023 to claim even more share from Tesco et al.
Why I’d buy other FTSE 100 shares
Tesco doesn’t just have to worry about losing customers to the Germans’ growing store networks, either. The FTSE 100 firm also faces the prospect of intensifying competition in its high-growth e-commerce business too.
Aldi has launched click-and-collect across hundreds of its UK stores, for example. This follows on from the sale of food parcels through its website during the first Covid-19 lockdown back in April. And of course Tesco faces a huge threat from US Internet giant Amazon which has invested huge sums in its global grocery operations in recent years.
City analysts reckon Tesco’s earnings will rocket 61% year on year in the upcoming financial year (to February 2022). This leaves the UK share trading on a rock-bottom forward price-to-earnings growth (PEG) ratio of 0.2. But I won’t be buying as I said above. To my mind those soaring competitive pressures make the FTSE 100 supermarket a risk too far.
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 Tesco and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.