Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at Tesco (LSE: TSCO) (NYSE: TSCDY.US) to ascertain if its share price can return to 487p.
Initial catalyst
Before we try and figure out if Tesco can return to 487p, we need to establish what caused the company’s share price to rise to this level in the first place. As with many of its peers, it would appear as if Tesco’s share price was swept up in the market euphoria of 2007, in the run-up to the financial crisis.
Actually, looking at the figures it is reasonable to suggest that at a price of 487p, Tesco’s was overvalued. In particular, for 2006 Tesco only earned 19.7p per share, which indicates that the company was trading at a historic P/E of 25.
But can Tesco return to its former glory?
Many investors are questioning Tesco’s ability to return to its former glory, as the company struggles to compete with peers. However, Tesco remains dominant with the global retail market and the company’s sales have done nothing but rise since 2006. Specifically, the company’s revenue has expanded approximately 55% during this period.
Still, while Tesco’s top line has done nothing but increase during the past few years, the company’s bottom line has come under pressure. In particular, rising costs and extraordinary items have pushed Tesco’s net income down 56% during the last year alone.
Moreover, Tesco’s operating margin has been squeezed from 5.9% as of 2009, to 3.4% reported for 2013. This figure is worrying because it means that Tesco is going to have to work extra hard to generate the same level of profitability as it has done in the past.
What’s more, back during 2006, Tesco was trading at a growth premium as investors were prepared to pay extra for the company’s size and ability to expand. However, with current market sentiment running against the company, Tesco is unlikely to command a growth premium again anytime soon.
Foolish summary
So overall, Tesco’s outlook appears to be cloudy. Indeed, while the company’s revenue continues to expand, profit margins have collapsed, which indicates that the company is going to have to work extra hard to drive profits higher again.
So overall, I feel that Tesco cannot return to 487p.
