Until a few weeks ago, the Tesco (LSE:TSCO) share price was on a solid run, rising by almost 30% since last April. Yet, following an announcement by one of its leading competitors, the stock got sold off by double-digits. And year to date, Britain’s largest supermarket has seen its market-cap shrink by more than 10%.
Is this a buying opportunity? Let’s explore what the latest analyst forecasts are predicting over the next 12 months.
Competitive price cuts might be no big deal
One of the leading reasons behind the sudden drop in Tesco’s share price last month is the announcement that competitor Asda is slashing prices. The UK’s third-largest supermarket has been struggling with falling profits, and management’s now looking to turn things around, sparking a £4bn industry-wide sell-off that Tesco got caught in the middle of.
The fear is that Asda’s actions will squeeze the already-thin profit margins of supermarkets like Tesco and Sainsbury’s. And when paired with a general rise of consumers seeking better prices on their weekly shopping trips, there’s understandable concern circulating the stock.
Roughly one week later, institutional investors updated their forecasts and reviewed their recommendations. A year ago, 12 analysts had recommended Tesco shares as either a Buy or Outperform. Following this latest update, that figure now stands at 14, with an average 12-month price target of 409p.
In other words, institutions are now seemingly more bullish about Tesco than before, even predicting the share price could rise as much as 25% from current levels.
Why so bullish?
Despite what the headlines suggest, there’s scepticism among analysts regarding Asda’s ability to execute the announced price cuts. The strategy only really works if sales volumes subsequently improve, which isn’t guaranteed.
Data from Kantar reveals that Asda’s market share over the last three years has shrunk from 14.6% to 12.6%, while Sainsbury’s and Tesco both expanded their territory along with Aldi and Lidl. Whether Asda’s new strategy will be sufficient to recapture lost customers is unclear.
This uncertainty is further increased by Asda’s new chair, Allan Leighton, who has said the process of turning Asda around could take five years. That’s plenty of time for Tesco to adapt, not to mention the grocer has a much stronger market and financial position.
However, despite the positive outlook from analysts, Tesco’s still exposed to some notable threats. Barclays’ latest consumer spending report reveals that grocery shopping activity fell into the red in February as more consumers become price conscious. If this trend continues, it’s a welcome tailwind for established discount retailers like Aldi and Lidl that could put pressure on Tesco’s market share.
The bottom line
Stepping back, I think investors might have jumped the gun on selling off Tesco shares. It’s possible that after a solid rally, Asda’s announcement was sufficient to spark some profit-taking activity. However, while there’s some notable short-term uncertainty surrounding a new price war, Tesco’s long track record of success makes me cautiously optimistic about Britain’s biggest supermarket. That’s why I think investors may want to consider taking a closer look at Tesco now that the share price has tumbled.
