The Tesco (LSE:TSCO) share price has been on a bit of a rampage in recent weeks. Since 10 April, the UK’s largest retailer has seen its market-cap expand by more than 20%, more than doubling the FTSE 100’s performance during this period.
This is quite a change of pace versus a few weeks before, where the threat of a new pricing war from rival supermarket chain Asda saw shares slip. So what sparked this rebound in investor sentiment? And where could the Tesco share price be 12 months from now?
Tesco continues to take market share
The UK grocery retail sector’s extremely competitive, so whenever a supermarket takes even a small piece of market share, it’s cause for celebration. That’s exactly what’s happened following Tesco’s latest interim results. The firm now controls 28.3% of the British grocery market – the highest in almost a decade.
At the same time, like-for-like sales, along with product volume growth, were both ahead of expectations. And that translated into £1.75bn of free cash flow being generated during the period, boosting the return on capital employed to 14.6%.
Needless to say, this is all rather positive. Yet management ultimately decided to cut its full-year guidance for underlying operating profits. Usually, reducing full-year targets isn’t a great sign. And initially, investors predictably acted negatively, with the Tesco share price falling on results day.
However, investment analyst Clive Black at Shore Capital actually praised the move and described it as Tesco “getting the knuckle-duster out”. It seems management’s getting ready to fight should a new pricing war break out. By lowering investor expectations it gives Tesco the flexibility to remain competitive with its own set of retaliatory price cuts. And since the firm’s financials are in much better shape than Asda’s, investors have begun placing their bets on the heavyweight retailer.
Analyst forecasts
Slashing prices might harm profits in the short term. But in the long run, it’ll help protect Tesco’s newly captured market share, while also making the cost of living a little easier on consumers. This appears to be a classic example of short-term pain for long-term gain. And with Tesco’s impressive track record, most institutional investors have either reiterated or issued a new Buy rating on the stock.
Currently, Deutsche Bank‘s the most bullish on the business with a 12-month share price target of 440p. On the opposite side of the coin, the analyst team at Jefferies has placed its target at a more pessimistic 350p. But overall, the average consensus for the Tesco share price currently sits at 387p. That’s roughly where the shares are trading today, so there doesn’t appear to be a massive opportunity for value investors here.
However, if Tesco can continue to expand its market share even in a potential pricing war, today’s share price could be a more than fair entry point. That’s why investors may want to consider taking a deeper dive into this enterprise for its long-term potential.
