Is Tesco PLC A Super Growth Stock?

Tesco2014 has not started well for Tesco (LSE: TSCO). Indeed, the biggest supermarket by market share in the UK has significantly underperformed the wider market, with shares being down around 10% year-to-date while the FTSE 100 is currently up 2%. Furthermore, Tesco continues to trade within 10% of its 5-year low of 280p, highlighting the lack of confidence that the market has in its future prospects.

However, could Tesco turn things around? Could it deliver strong growth and ever be classed as a super growth stock?

Weak Forecasts

Based on the evidence of 2014’s forecasts, Tesco should certainly not be classed as a super growth stock. That’s because it is expected to report earnings per share (EPS) that are 14% lower than they were in 2013, which shows that things are set to get worse before they get better. Furthermore, the forecast fall in EPS would be a continuation of the trend that emerged in 2012 and 2013, when Tesco’s bottom-line began to slide. Overall, EPS is expected to be one-third lower in 2014 than it was in 2011, which represents a vast fall in profitability in a relatively short time frame.

The Future Looks Bright(er)

Although Tesco looks set to report yet another year of negative growth in EPS in 2014, 2015 could be a whole lot better. That’s because the company is expected to increase EPS by 2% in 2015 and, in doing so, would arrest a 3-year decline in earnings. Although below the market average, a 2% increase in earnings would be a hugely positive step for the company and could help to improve sentiment, which has been hit extremely hard in recent years.

Looking Ahead

At present, it is difficult to see how Tesco can muster above-average earnings growth at a time when the UK supermarket sector (which Tesco relies upon for the bulk of its revenue) is becoming increasingly competitive, with peers such as WM. Morrison announcing savage price cuts in an attempt to win back market share.

As a result, Tesco’s value as an investment may not be in providing strong earnings growth, but rather in offering an attractive, well-covered dividend (shares currently yield 4.7% and are more than twice-covered by net profit) as well as reduced share price volatility than many of its index peers. Although not a super growth stock, Tesco could still prove to be a relatively attractive performer when these two attributes are taken into account.

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Both Peter and The Motley Fool own shares in Tesco.