The Tesco (LSE: TSCO) share price has shaken amid broader market volatility in recent days.
Britain’s biggest retailer slipped to its cheapest since early October as concerns over rampant inflation grew. However, at 260p per share, the Tesco share price remains 15% more expensive than it was a year ago.
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Can the FTSE 100 company rebound and resume its year-long uptend? And should I buy Tesco shares at their current price?
Why I’d buy Tesco shares
The main reason I’d buy Tesco is for its exceptional online business. Getting exposure to e-commerce is something I’ve been building since Covid-19 first hit. Investing in Tesco business could significantly boost my returns from this area even further.
Analysts at Mintel think the online grocery market will continue growing strongly following the pandemic. They think the segment will be worth £22.4bn by 2025, up almost £5bn from pre-coronavirus times. Tesco’s been investing heavily since 2020 to make the most of this opportunity. And it continues to build its network of fulfilment centres rapidly.
Why I worry for Tesco’s share price
Tesco might be better placed in the near term than more cyclical UK shares. Food retail is more stable than many other sectors when the going gets tough. But the FTSE 100 firm still faces immense risks including:
#1: Rising costs. Tesco’s cost base could balloon because of several factors. Energy, freight, product and labour costs could all keep rocketing well into 2023 if supply chain issues persist. I also need to consider how the possible scrapping of the Brexit trade deal could elevate long-term costs.
#2: Increasing competitive pressures. Tesco’s wafer-thin margins are coming under extra strain too as the price wars heat up. Iceland has announced plans to offer discounts to over 60’s, for example. Extreme market congestion is only going to worsen too as Aldi and Lidl rapidly expand.
#3: Sliding consumer spending. Food retail is more resilient than the broader retail industry. But it’s not immune and signs are emerging that people are reducing spending here as the cost of living crisis bites. Tesco doesn’t only have to worry about falling demand for its core lines either. Sales of its non-essential items are in danger of reversing sharply.
The verdict
I believe the FTSE 100 retailer faces a variety of colossal risks in the short, medium and long term. It’s my opinion that these dangers aren’t reflected in Tesco’s share price right now.
The grocer currently trades on a forward price-to-earnings (P/E) ratio of 12.3 times. This isn’t exactly a sky-high rating. But I’d be expecting Tesco’s share price to trade closer to (or even below) the accepted bargain benchmark of 10 times given that multitude of significant dangers.
It also offers worse value than FTSE 100 rival Sainsbury’s. Tesco’s also high-risk rival trades on a forward P/E ratio of 10.6 times.
I’m happy to ignore Tesco shares and go dip buying for other UK stocks. I think Tesco’s share price could slide when fresh financials are released on 17 June.
