There Is Still One Good Reason To Buy Tesco PLC

Tesco’s Mighty No-Show

See the mighty fallen. Stricken supermarket giant Tesco (LSE: TSCO) once bestrode the UK high street like a Colossus. Now its foundations have been shaken, and the cracks are showing. I can name plenty of reasons to avoid Tesco right now, but there is one good reason why you should still consider buying it.

Tesco has looked unsteady for years. It overreached itself in the US, with its disastrous Fresh & Easy venture, and lost battles in Korea and Thailand. On the home front, customers turned against it, complaining about the staff, the stores, the produce and the prices, and making a beeline to Aldi and Lidl instead. Tesco’s size and scale has ultimately worked against it, forcing it to scrap plans for yet more cavernous out-of-town stores, and desperately trying to become more family-friendly (or just friendly).

TescoBad News From Kantar

The recent departure of finance director Laurie McIlwee has left Philip Clarke as the only permanent executive in senior management, raising uncomfortable questions about succession planning. There have also been uncomfortable questions about McIlwee’s departure, said to have followed tensions with Clarke. Meanwhile, market share continues to fall. Tesco’s share is now 28.6%, down from 29.7% one year ago, according to latest figures from Kantar Worldpanel. Sales have fallen 3% in the last 12 weeks. 

It is no consolation that J Sainsbury has seen its market share fall even faster. This merely confirms suspicions that the sector is at the sharp end of a structural shift in the way we shop. The mooted price war would only worsen matters. Tesco is fighting back, however, with strong growth in online sales, the success of Click & Collect, and its expanding convenience store business.

Greedy Investors Shop At Tesco

Tesco has been rotten value for shareholders. During the bull run of the last five years, when the FTSE 100 doubled, its share price fell 15%. Even Warren Buffett has lost patience, offloading one quarter of his shares last year. He famously said his favourite holding period is forever. Not where Tesco is concerned.

You already know by heart Buffett’s mantra about being greedy when others are fearful. This now applies to Tesco. As investors flee, you can buy it at just 7.9 times earnings, and pop a whopping 5.2% yield into your basket. Tesco is urgent need of a thorough overhaul. Current pressures should force management to act.

Despite its troubles, Tesco is still on course for a full-year profit of well over £3 billion. It remains a mighty operation. After falling 25% in the year, it is also is the ultimate contrarian buy. If next week’s results are as bad as some fear, that could be your opportunity.

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Harvey Jones doesn't own shares in any company mentioned in this article. The Motley Fool owns shares in Tesco.