The UK’s biggest supermarkets operator Tesco (LSE:TSCO) is a constituent of the FTSE 100 index. As a leading food retailer that also has its own bank, it operates throughout the UK and Europe. I’ve been thinking about buying at the current Tesco share price and holding for the long term. Could this firm deliver growth within my portfolio? Let’s take a closer look.
Historical results and the Tesco share price
The business has a strong historical results record. For the years ended February, between 2017 and 2021, revenue increased from £55.9bn to £57.8bn. While this may not appear a massive increase, profit before tax soared from £145m to £825m over the same period. Unsurprisingly, earnings-per-share (EPS) rose from 6.68p to 11.94p.
It’s encouraging to see that the company has delivered for its shareholders year in, year out.
It should be noted, however, that past performance is not necessarily indicative of what it will do in the future.
So how do I judge it from here? Well, a look at the price-to-earnings (P/E) ratio may suggest whether or not the current Tesco share price is low.
A trailing P/E ratio is found by dividing the share price by earnings. This equates to 21.08. A major competitor, J Sainsbury, has a trailing P/E ratio of 21.65. Therefore, while Tesco may not be ‘dirt cheap’, it could be undervalued at current levels. At the time of writing, it’s trading at 277p, up 20.6% in the past year.
Challenges ahead
It’s also interesting that in late March 2022, investment bank Morgan Stanley revealed that it preferred Tesco to J Sainsbury.
The reasoning was that the company will be better able to deal with the pressures of food and wage inflation. That’s important as food inflation hit a 10-year high this month.
And it seems to be coping with inflation so far. Tesco lifted its profit guidance in an update released in January. It did, however, warn of future challenges regarding costs and prices. Operating cost inflation, for example, could reach 5% in 2022.
In more positive news, for the three months to Christmas 2021, group sales increased 2.6% year on year.
Additionally, the company noted that it currently has its highest share of the UK food market in four years. CEO Ken Murphy stated, however, that “growing cost pressures and supply chain challenges” were impacting the entire industry.
While it appears that there are struggles ahead, I’m confident that the firm’s strong financial position will enable Tesco to emerge stronger. It currently has operating cash flow of £1.1bn.
Overall, this business is built on strong foundations. But the inflation issue may still take the Tesco share price lower. On the other hand, I think that this is a short-term problem that will subside over time. While I won’t by buying shares in the company at the moment, I wouldn’t rule out a purchase after I see that the business has successfully navigated near-term challenges.
