In June 2021, I wrote an article claiming that the Tesco (LSE: TSCO) share price was deeply undervalued. As it turns out, I was right on the money (quite literally in this case).
Over the past 12 months, the stock has produced a total return for investors of 16.6%. It has slightly outperformed the FTSE All-Share Index, which returned 16.4% over the same period.
Over the past three years, the company’s performance has been even more impressive. The stock has produced a total return of 11% per annum. That is more than double the FTSE All-Share return over the same time frame.
I think the performance of the Tesco share price over the past three years illustrates the company’s defensive qualities. As other businesses have struggled through the pandemic, the firm has capitalised on its strengths.
And while past performance should never be used as a guide to future potential, I think these strengths will continue to work in the company’s favour as the economic outlook becomes more uncertain.
Uncertain economic outlook
The outlook for the global economy is becoming more uncertain by the day. The supply chain crisis and geopolitical tensions are just two risk factors businesses like Tesco must grapple with.
At the same time, inflation pressures worldwide are pushing up the cost of goods and services, particularly commodity prices. Rising prices are squeezing company profit margins as most businesses can only pass on a small percentage of these price hikes to consumers.
Tesco is not immune from these challenges. Still, it does have room to navigate some of these headwinds. It is large enough to negotiate special deals with suppliers to keep prices low for customers.
It also has plenty of financial flexibility to absorb costs. The group recently announced that it would be reducing store opening hours and removing fresh fish and meat counters in most large stores to reduce costs.
The enterprise is also investing significantly in other efficiency initiatives, such as its rail freight operation. The overall aim of these endeavours is to offset inflation pressures and overcome global supply chain issues.
The Tesco banking arm also provides a valuable source of diversification and additional profitability for the group.
Tesco share price potential
Despite the general economic uncertainty, analysts believe the company’s net profit will increase marginally over the next two years. I think these projections illustrate the organisation’s defensive nature in a challenging environment. Earnings per share should hit 22.1p in its 2023 fiscal year, up from 16.4p for 2019 according to current City projections.
Based on these estimates, the Tesco share price is currently on a forward price-to-earnings (P/E) multiple of 13.4. It also supports a dividend yield of 3.7%. While this valuation does not look particularly cheap, considering the company’s competitive advantages, I think the stock looks like an attractive investment at current levels.
As such, I would continue to buy the investment for my portfolio today. I think the company could provide a great safe haven for my portfolio in times of uncertainty.
