Is the Tesco share price getting a Morrisons boost?

The Tesco share price has started to pick up after the Morrisons bidding battle. Is the whole supermarket sector undervalued?

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The takeover battle for Morrisons has pushed its shares up 49% since the first bid emerged, and they’ve gained 44% over the past 12 months. Is it the turn of Tesco (LSE: TSCO) now? In the past few days, the Tesco share price has been picking up.

I really don’t think we’ll be seeing any bids for Tesco. After all, we’re looking at the biggest company in the sector, already valued at over £18bn. It would be interesting to see someone having the courage to make a move though. But I do think the Morrisons saga has shown that the supermarket sector is probably undervalued.

If there is a next supermarket takeover bid, City talk suggests it could be for J Sainsbury. It has just reported a first quarter ahead of expectations. But that’s not the reason the pundits think it might make a tasty target. No, Sainsbury has a property portfolio valued at around £10bn, which is quite a bit more than its market cap of £6.3bn.

A different approach to valuation

That brings me back to Morrisons, and a warning from Legal & General Investment Management (LGIM) on Monday. According to The Guardian, a senior fund manager at LGIM said: “If an acquirer makes strong returns this should come from making the company a better business. It should not come from buying its property portfolio too cheaply, levering the company up with debt, and potentially reducing the tax paid to the exchequer.”

So maybe the bidders aren’t seeing Morrisons as an undervalued business as much as a cheap portfolio of assets. Morrisons shareholders will get their cash anyway. But are there any lessons here for long-term private investors, specifically those with their eye on the Tesco share price?

Eyes peeled for everything

It’s reminded me to keep my eye on all aspects of a company’s valuation. I might be tempted to focus on P/E and dividend yield. But that gives far from the whole story, and the balance sheet and asset situations are also key. Very often, we’re looking at a hefty negative balance sheet. So for me, businesses on attractive valuations but with big debts are to be avoided.

I have no fears for Tesco there. But what about its property portfolio? In its 2020/21 results, Tesco reported property, plant and equipment assets to the tune of £17.2bn. In this case, that’s just below the company’s market cap. It’s still another factor in valuing the Tesco share price, mind.

A Tesco share price reappraisal?

I recently examined Benjamin Graham’s famous maxim that in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine. I looked at what that means for long-term value investors.

These latest developments remind me that I need to take into account all of the factors that might make a company attractive, to all manner of investors. And that a stock bought at an attractive valuation is almost always worth keeping for the long term. I do think the Morrisons saga could help investors to reappraise the Tesco share price.

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 considered so you should consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons 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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