The Tesco share price is down over 10%. Is it time to buy?

The Tesco share price has taken a hit recently due to inflationary concerns. Here, this Fool decides if now is the time to buy.

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The last 12 months have seen the Tesco (LSE: TSCO) share price rise nearly 15%. However, year-to-date the stock has seen a 13% fall in its price. With macroeconomic concerns continuing to fuel market volatility, it’s clear to see Tesco has suffered.

Yet, trading at 256p, could this fall be an opportunity for me to buy the stock?

Why has the Tesco share price suffered?

Supermarkets tend to perform well during difficult times due to the essential products or services they provide. However, the main reason for the fall is the threat of inflation. With it rising to 9% in the UK for May, customers will be forced to limit their spending and potentially look for cheaper alternatives.

Surging inflation may also see staffing costs rise. With over 350,000 employees, this could have a massive impact on Tesco’s operating costs. With pressures like these, the Tesco share price has been forced down.

Is it time to buy?

So, does this fall present an opportunity to buy? Let’s start by looking at Tesco’s share price valuation. The stock currently trades on a price-to-earnings (P/E) ratio of 13. This is above the benchmark figure of 10. And compared to competitors, such as Sainsbury’s with a P/E of just 7.4, this looks expensive.

However, while this may seem high, as the UK’s largest retailer, Tesco has a competitive advantage over its rivals. The firm has larger purchasing power and because of this can produce lower per-unit costs. Further, it also had a dominant position in the industry with a 27% market share. With inflation continuing to peak in the UK, the stock also offers a sizeable 4.3% dividend yield. For me, these are all tempting factors.

Yet recent times have seen the rise of budget supermarkets such as Aldi and Lidl. And the cost-of-living crisis only intensifies the threat these businesses provide to Tesco. Both low-cost chains saw sales grow by 6% in the 12 weeks to 15 May, whereas the wider market saw overall sales fall by 4%. Should Tesco have to increase prices in line with inflation, this could see more consumers making the switch to these cheaper alternatives. This would no doubt hurt the Tesco share price.

With this said, Tesco still posted good results in its Q1 update earlier this month. Like-for-like UK and ROI sales rose by 1.5% year on year. And over three years, this was a 9.7% rise. The £12.5bn sales figure exceeded pre-Covid results, showing the strong recovery the business has made. And what was also impressive was the 9% sales growth seen in Central Europe for Q1, highlighting the international strength of Tesco. As a potential investor, these are encouraging results.

So, should I buy Tesco? While inflation will pose a threat to the Tesco share price in the months ahead, I think the shares could be a strong addition to my portfolio today. Its Q1 results are impressive. And despite its slightly high valuation, I think its competitive advantage justifies this. Its dividend yield is also a bonus. At 256p, I’d be willing to buy Tesco shares today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) 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.

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