The Tesco (LSE: TSCO) share price has risen spectacularly over the past month or so. The FTSE 100 stock soared 10% over the course of August. And it recently touched 17-month peaks above 250p per share.
The supermarket’s gains have been heady. But on paper the Tesco share price still seems to offer terrific value. City analysts think earnings at the grocer will soar 150% this fiscal year (to February 2022). This leaves Tesco trading on a forward price-to-earnings growth (PEG) ratio of 0.1. A reading below 1 suggests a stock may not be sufficiently valued by market makers.
On the plus side
There are several good reasons why investors are buying Tesco shares again. These include:
- A possible takeover attempt. The bidding war for Morrisons has been one of the big FTSE 100 stories of the year. Fellow Big Four supermarket Asda is also in the process of being bought. And rumours are swirling that Sainsbury’s could also be hoovered up soon. Sure, Tesco would cost much more than its industry rivals. But could it also become a target, possibly from a major retail giant like Amazon? I for one wouldn’t be surprised.
- High customer satisfaction scores. Encouragingly Tesco scores better than almost all its rivals when it comes to customer satisfaction. The Institute of Customer Service’s latest survey showed the FTSE 100 chain beaten only by Aldi, M&S, and Waitrose on this front. Tesco’s invested heavily in its products, stores, and processes in recent years to steal a march on its rivals and it seems to be paying off.
- Tesco’s excellent online proposition. Covid-19 lockdowns during 2020 and 2021 helped to supercharge online sales at the likes of Tesco. But the party isn’t over and Statista thinks Internet grocery sales will rocket 43.8% between 2019 and 2024, making online the fastest-growing part of the market (even beating the discount segment). This bodes well for Tesco, which operates the country’s leading online operation.
Why I fear for Tesco’s share price
There’s clearly reasons to be bullish about the Tesco share price, then. But despite its cheapness this is a UK share that still carries too much risk for me.
The first concerns the prospect of painful and prolonged shortages of goods following Brexit withdrawal. Today the UK Trade & Business Commission claimed that the problem of empty shelves could get worse when new customs checks come into effect next month. There’s also the possibility of soaring labour costs in the years ahead as a result of post-Brexit immigration rule changes. Tesco has already been offering large financial ‘golden hellos’ to its truck drivers to keep its shelves filled.
I’m also worried by the problem of rising competition for its stores and its online operations. Amazon has recently opened physical stores in central London to complement its entry in the UK grocery market. Meanwhile discounters Aldi and Lidl continue to aggressively expand their store estates. The long-term outlook for the Tesco share price remains packed with danger, in my opinion. Therefore I’d rather buy other blue chip shares right now.
