Is the Tesco (LSE: TSCO) share price currently too cheap to miss? Well, I’m not going to argue that the retail giant offers mighty value for money, at least on paper.
City analysts think the FTSE 100 firm will report a 173% earnings jump in the year to February 2022. Consequently, the Tesco share price commands a price-to-earnings growth (PEG) ratio of just 0.1. This is well inside the widely-regarded bargain benchmark of 1.
Tesco offers market-beating value when it comes to dividends too. Its forward dividend yield sits at 3.6%, around 20 basis points better than the broader FTSE 100 average.
Why I like Tesco shares
Tesco certainly has a lot going for it, even if it’s not quite the retail colossus of yesteryear. Failed ventures into foreign markets like the US and Japan saw it take its eye off its core UK market and allowed competitors such as Aldi and Lidl to slip in and win customers with their low-cost models.
However, Tesco is still a formidable operator. It has the financial clout that allows it to exploit opportunities smaller rivals can’t. Its huge investment in rail freight, for example, is allowing it to avert the worst of the supply chain crisis that is hitting its rivals. This same might gives it the power to spend elsewhere, like in improving the customer experience and the quality of its products.
I also really like Tesco’s market-leading online proposition. The grocer supercharged its internet capacity to 1.5m delivery slots per week during the pandemic, and it’s committed to continue investing heavily here, such as through the expansion of its distribution centre network.
Retail Economics say that one-third of UK grocery shoppers plan to permanently increase the frequency that they shop online following Covid-19. The growth potential here is huge as the digital revolution takes off and consumer habits change.
That said, it’s clear Tesco won’t have things all its own way on this front. Other major supermarkets like Sainsbury’s and Morrisons have invested heavily in their own online propositions. Even Aldi has come to the click & collect party more recently and there are suggestions Lidl could enter the fray too.
The entry of Amazon into the UK marketplace is also a threat Tesco investors need to take seriously. It isn’t just online where the US internet giant is flexing its muscles either. Amazon opened its first till-less grocery store in London earlier this year. And rumours are doing the rounds that it’s has plans to open 260 supermarkets over the next few years. The ribbon will be cut on 60 stores next year alone, City AM reports.
Despite Tesco’s considerable clout, I’m afraid the intensifying competitive pressures it faces makes me reluctant to buy it today. This has the capacity to keep eroding revenues and shave even more off of the stock’s ultra-thin margins.
Sure, Tesco’s share price is cheap, but I think it’s cheap for a reason. I’d much rather buy other FTSE 100 stocks today.
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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 has recommended Amazon, 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.