2023 has been a strong year for the Tesco (LSE:TSCO) share price. And this coincides with a strong year for the underlying business in terms of both revenues and profits.
According to analysts at J.P. Morgan, though, this might be as good as it gets for both the company and the stock, at least for some time. So is now a bad time to buy Tesco shares?
Down from here?
J.P. Morgan’s analysts have a price target for Tesco shares of £2.30 for next year. That’s around 18% lower than the current level of the stock.
The main reason for this is that the analysts think the grocer’s strong results from this year are going to prove temporary. They anticipate weaker results moving forward as inflation continues to fall.
In 2023, Tesco has performed well. Despite pressure from the likes of Aldi and Lidl, the company has managed to increase its market share slightly, while getting more from its existing customer base.
A significant amount of this has come from passing through the effects of lower commodities prices to customers. This has allowed Tesco to remain competitive with the discount retailers.
Essentially, the thesis is that Tesco is at a cyclical peak, and 2024 will be a lot tougher than 2023. I think there’s some merit to this, but it’s also worth a look from a longer-term perspective.
The long-term view
Even if it’s true that 2023 has been an unusually good year for Tesco, it’s worth looking at the company’s prospects beyond 2024. And my view is mixed here.
My biggest concern is that industry competition is fierce and retaining shoppers is difficult. As well as Aldi and Lidl continuing to expand, Sainsbury has been making big gains in customer numbers.
A large Clubcard membership is a positive, but the reality is that price is biggest issue for customers. As such, the only real competitive advantage is lower costs, but this is difficult to establish.
One promising development for Tesco is its move towards owning its stores, rather than leasing them. This should help the firm control costs going forward, allowing it to maintain lower prices to customers.
I think this is a good use of the company’s free cash. But the issue, in terms of generating a competitive advantage, is that Sainsbury is also doing the same thing with its stores.
Has the Tesco share price peaked?
It’s worth noting that most analysts disagree with J.P. Morgan’s bearish prediction for next year. The average price target for Tesco stock is around £3.22.
The Tesco share price has been up and down over the last decade, though, and the same is true for its revenues, profits, free cash flow, and dividends. This is somewhat surprising for a stock in a defensive sector.
That means the last 12 months might just be part of the usual cyclicality, rather than part of a structural uplift. Therefore, I don’t we should get too carried away just yet.
The company’s resilience as a discount retailer taking market share from competitors has undoubtedly been impressive. But I’m not expecting significant growth from the business going forward.
