Supermarkets are often seen as defensive businesses, so it is not surprising that at a time of market volatility they can attract investor attention. Still, Tesco (LSE: TSCO) has been doing very well lately. Over the past year, the Tesco share price has moved up 32%.
Now, that may not be because of factor specific to Tesco. Rival J Sainsbury has moved up by 31% over the same period.
Still, the Tesco share price has been doing well. Can it now reach £5?
A tough market and not getting easier
The share price rise might suggest that Tesco is in clover.
But the UK grocery market is a very difficult one — and I think it could get harder still.
While demand is resilient and likely to stay that way (we all need to eat), the market is highly competitive and that leads to low profit margins.
In the first half of this year, for example, Tesco reported a pre-tax profit of £1.3bn. That may sound like a lot, but the company’s sales (excluding VAT and fuel) were £33.0bn. That means the company achieved a net profit margin of less than 4%.
Weak consumer confidence combined with rising employment and tax costs have taken a toll on UK retail. B&M European Value Retail’s poor performance this year is evidence of that: the discount retailer’s share price has crashed 48% so far in 2025.
Against that backdrop, I think Tesco has its work cut out simply to keep doing as well as it is, without aiming for significant growth.
Share price rise seems hard to justify
Given how the Tesco share price has risen this year, it now sells for 20 times earnings.
Again, that is almost right in line with J Sainsbury , which sells for 20 times earnings.
But does such a valuation make sense?
After all, the growth prospects for the sector look modest to me. Tesco as the dominant player already has a large position, so it is more difficult for it to grow by gaining market share, when compared to smaller rivals like Aldi and Lidl.
Personally, I do not see the valuation as attractive. Tesco to me now looks priced for significant growth and I do not expect to see that over the next several years. At the current share price, I have no plans to buy Tesco shares for my portfolio.
The share may go higher
Clearly, though, a lot of other investors feel Tesco deserves a higher valuation than I do.
Could the Tesco share price hit £5?
If markets remain strong I think it could.
That would require an increase of only 9% from the current share price. Broad market optimism could help keeping push the price upwards and any company’-specific good news would also help.
I see Tesco as a well-run, proven business and I would happily buy the share if I could do so at an attractive price. But, for now, I will sit on my hands.
