Despite enduring volatility in March, the Tesco (LSE:TSCO) share price is up more than 25% in the last 12 months. And factoring in dividends paid during this period, investors who put £1,000 to work last June are now sitting on a pretty pile worth around £1,265.
Considering the FTSE 100 only delivered a 10.3% total return over the same period, Tesco’s proven itself to be a market beater. The question now is, can it do it again?
Here’s what the experts are saying
The institutional opinion surrounding Tesco shares is pretty bullish at the moment. Of the 16 analysts following the business, 13 either rate it as an Outperform or a full-blown Buy.
When looking through the investment reports from Citigroup, HSBC, and Barclays, there seems to be a range of factors driving their positive opinions. But some recurring themes do emerge specifically: the retailer’s expansion of its market share, growing same-store sales, better-than-expected earnings, and continued substantial free cash flow generation.
Needless to say, these traits are exactly what long-term investors like to see. And that was made perfectly clear when the Tesco share price rallied on the back of its latest results, bouncing back from the competitor-induced March tumble.
As a quick reminder, earlier this year rival retailer Asda announced its intention to start cutting prices aggressively, potentially sparking a new pricing war that would squeeze already thin profit margins across the sector.
So does that mean more double-digit share price growth is on the horizon? Looking at the forecasts, that doesn’t seem likely. Despite analyst optimism, the consensus share price target seems to lie between 400p and 420p. That’s pretty close to where the shares are currently trading, suggesting that a lot of the company’s progress is already baked into the market-cap.
Assuming the stock does reach 420p over the next 12 months, a £1,000 investment today would grow to just £1,063 with an extra £35 from dividends. Still, a near-10% potential return is nothing to scoff at, especially from a more mature retailer.
What could go wrong?
Even with its market share gains, Tesco isn’t the only grocery retailer thriving right now. Discount sellers like Aldi and Lidl have also been expanding their reach. And with food prices expected to continue rising this year, more consumers may be pushed into the arms of its cheaper rivals. At the same time, a higher minimum wage, along with national insurance contributions, is driving up the firm’s operating expenses.
Tesco isn’t powerless in this situation. Its popular Clubcard Prices have proven to be an effective tactic for defending its market share so far. And with the entire sector being exposed to higher labour costs, Tesco is seemingly in a stronger position to absorb these new expenses and remain competitive among price-sensitive consumers. However, both of these tactics put pressure on profit margins.
The bottom line
All things considered, I think it’s unlikely that the Tesco share price will deliver explosive returns over the next 12 months. This is especially true if Asda goes through with its plans to spark a new pricing war. However, for those seeking to diversify and take up a more defensive position within their portfolios, Tesco shares could potentially be worth a closer look.
