Tesco (LSE: TSCO) shares have done well in the past few months. But can the trend continue, and where might the Tesco share price be by the end of the year?
Supermarket shares have been up in the air a bit following the bidding war for Morrisons. It’s looking increasingly like that particular battle is over now. And the Morrisons share price has been holding steady around the 290p level for a few weeks.
Speculation that Sainsbury could be next in line for takeover sent that stock flying too. But since a peak in August, the Sainsbury share price has settled back again. It looks like takeover fever has cooled off a bit now. But might it be helping keep the Tesco share price buoyant?
I doubt anyone seriously expects a buyout bid for Tesco, the UK’s biggest groceries retailer. We’re looking at a market cap of £20bn as it stands. And for any bid to be successful, it would need to be at a decent premium. The potential to sell off non-core assets and pocket a pile of cash is not there either, as Tesco has already done that.
Core business focus
Back in February, the company sold off its Malaysia and Thailand businesses to CP Group for £7.6bn. Approximately £5bn went to fund a special dividend, with the rest paid into the employee pension fund. That, incidentally, is the reason why the Tesco share price is showing a 12-month fall of 9%. The total value of the company essentially dropped by the amount of cash handed out.
Tesco has now focused mainly on its UK and Republic of Ireland (ROI) businesses. And while that simplifies the company, it also complicates the matter of valuation. Any comparatives to a year ago were already hampered by the pandemic effect. And now we need to take the restructuring into account when trying to weigh up the company against pre-pandemic trading.
But so far, 2021 seems to be going well. In the first quarter, Tesco recorded a UK like-for-like sales increase of 9.3%. ROI sales did even better, rising 13%. And those are not increases from last year, when lockdown was making a mess of retail figures. No, these gains are in comparison to the equivalent period in 2019.
Tesco share price boost?
Keeping that pace of growth going long term is not really feasible. But it does help convince me that Tesco was right to sell off its Asian interests. Saying that, it does leave the Tesco share price more open to UK economic pressure than before.
The Bank of England is holding interest rates at 0.1% for the time being. But we’ve already seen year-on-year inflation reaching 3.2% in August, and the BoE says it expects it to exceed 4% by the end of the year. That suggests Tesco could face inflationary pressure on margins in the coming months, as it takes time for rises to work their way through to consumers.
But on the whole, I’m still bullish. We have interim results due from Tesco on 6 October. I expect to see a slowdown in growth from those Q1 sales. But if Q2 comes anywhere close, I could see the Tesco share price getting a fresh boost.
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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.