As the largest supermarket retailer in the country, Tesco has a huge competitive advantage over its peers. Not only does it have a more significant share of the market, but its countrywide distribution network would be challenging to replicate.
Tesco’s balance sheet provides some indication as to the scale of this business. Including property, inventories, and leases on assets like warehouses, the group owns around £40bn of assets. That is compared to its current market capitalisation of about £20bn.
This figure excludes liabilities, so it is limited in its use. However, I think it provides a great illustration of how much it would cost a competitor to replicate the FTSE 100 group’s operations. That is without including the value of its brand.
One estimate pegs the value of the Tesco brand alone at £7bn.
Tesco share price value
I think these numbers illustrate the overall value of the enterprise, although they do not have any relation to the company’s equity market valuation.
When it comes to the valuation of the Tesco share price, I think the stock looks cheap.
Shares in the group are currently changing hands at a price-to-earnings (P/E) multiple of 12.8. That is a relatively inexpensive multiple for a company with substantial competitive advantages. The stock also offers a dividend yield of 4%.
Having said all of the above, the FTSE 100 retailer does face some threats to its growth in the near term. Challenges it will have to overcome include rising prices, which could eat into its profit margins if it cannot pass them on to consumers.
The grocery industry is also becoming more competitive. The discounters Aldi and Lidl are planning to spend billions over the next few years trying to grab market share from companies like Tesco. There is no reason to suggest they will not succeed. These challenges could force Tesco to lower its prices and sacrifice profits.
FTSE 100 bargain
While I think it would be foolish to overlook these challenges, I also think Tesco has the size and scale to overcome these issues.
As it deals with these issues, at least management can rest safe in the knowledge that consumers will always need to eat and drink. Therefore, there will always be a need for the group’s services.
As such, even if the Tesco share price goes nowhere for the next year or so, I believe in the long term, it will almost certainly register a positive performance as sales expand. As the UK’s population continues to rise, demand for food and drink will also grow. Demand for these products may also increase in line with the economic expansion as consumers have more money to spend.
That is why I would buy the FTSE 100 stock for my portfolio today. I think the shares are incredibly undervalued, considering their potential.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.