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Tesco PLC’s Retreat Makes Me Even More Optimistic

Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) has finally agreed to sell up and move on from its ‘misadventure’ in America.

Although some investors may view this as a weakness, I think that being able to admit defeat is a key part of business. Indeed, there is little point in continuing to rack up losses in something that has already been given many, many years to come good.

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So, the announcement of the sale of the supermarket’s Fresh & Easy franchise to Yucaipa is, in my view, a hugely positive step for the company.

Not only does it mean that further losses will not hurt Tesco’s income statement, it also means that a significant amount of capital and management time can now be devoted to more attractive areas, including the UK.

Indeed, I would expect to see Tesco emerge as the ‘king’ of UK supermarkets over the next few years, simply because I believe it has the most efficient supply chain, the right mix of quality and low prices, as well as some of the best locations across the country. Its online and convenience store offerings also mean that it is well positioned to take on rivals.

Furthermore, the recent joint venture it signed in China, as well as further expansion plans in Europe and Asia, highlight that this is a company with a lot of potential and that, although the UK remains its most important market, there are substantial opportunities elsewhere.

In addition, the shares offer an attractive yield of 4%, growing to 4.4% over the next two years according to market forecasts (and assuming the share price stays where it is).

What’s more, the shares trade on a price to earnings (P/E) ratio of just 10.3. This is attractive on a standalone basis, but especially so when compared to the FTSE 100 and to the wider consumer goods industry group. They currently trade on P/Es of 14.8 and 17.2 respectively.

So, I think the sale of the Fresh & Easy brand is great news for investors like me. I believe it will mean a renewed focus on other, more profitable areas, while I’m a happy shareholder because of the above-average yield and good value that shares currently offer.

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> Peter owns shares in Tesco. The Motley Fool owns shares in Tesco.

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