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Does Tesco PLC Provide Decent Value For Money?

In this article I am looking at why I believe Tesco (LSE: TSCO) is a risky stock selection even at current prices.

Price to Earnings (P/E) Ratio

Tesco’s is facing a monumental task to turn around persistent sales woes and resurrect earnings growth, a point underlined by its Tescomost recent financial update. This showed like-for-like sales, excluding fuel, slump 3.7% during March-May, speeding up from the 2.9% decline printed during the previous quarter.

Looking at current analyst forecasts, Tesco currently changes hands on a P/E rating of 11.2 for the year concluding February 2014, and which moves to 11 for the following 12-month period. These figures  fall comfortably below the benchmark of 15 which is generally regarded as reasonable value, suggesting that the firm’s poor performance is currently factored into the share price.

Price to Earnings to Growth (PEG) Ratio

Although Tesco is pulling out all the stops to rejuvenate its ailing fortunes on the British grocery scene, the retailer has so far proved unsuccessful in attracting fresh custom through its doors. Indeed, the firm has seen earnings fall in the past two years, and brokers expect the supermarket to punch a further 16% decline in fiscal 2015. A slight 2% improvement is predicted for 2016.

This year’s additional earnings dip fails to create a valid PEG rating, of course, although next year’s modest recovery produces a reading of 4.9. Still, this is far beyond the yardstick of 1 which generally represents excellent value relative to the firm’s earnings potential.

Market to Book Ratio

Tesco’s book value, once total liabilities are deducted from total assets, comes out at some £13.4bn. This figure produces a book value of £1.67 per share which, at current share prices, creates a market to book ratio of 1.8. This falls outside the benchmark of 1 or below which is widely regarded as decent bang for one’s buck on a ‘bricks and mortar’ basis.

Dividend Yield

Consistent pressure on the bottom line has forced the shopping goliath to keep the full-year dividend at 14.76p per share for the past three years. But something is expected to give this year in line with fresh earnings woe, and Tesco is anticipated to cut the payment to 14p. A slight rise to 14.2p is currently pencilled in for 2016.

Investors should be aware that these projections still create chunky yields of 4.6% and 4.7% for 2015 and 2016 respectively. Not only do these readings comfortably surpass a forward average of 2.6% for the entire food and drugs retailers industry, but a corresponding figure of 3.2% for the FTSE 100 is also easily taken out.

A Precarious Shopping Selection

Although Tesco is targeting the white-hot growth areas of online and convenience outlets to turn around its ailing performance in the UK shopping space, the firm has been unable to stymie the charge of the likes of Aldi and Lidl, even with the introduction of heavy discounting across a multitude of product ranges.

With the budgeteers also rapidly accelerating their own expansion plans, I believe that expectations of a modest recovery in Tesco’s sales performance from next year could be hammered, and with it current earnings and dividend expectations. In my opinion Tesco is a stock not for those seeking cast-iron value for money.

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> Royston does not own shares in Tesco. The Motley Fool owns shares in Tesco.