Is Tesco PLC A Promising Capital-Growth Investment?

tesco2An investment in Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) now is surely an investment betting on the supermarket chain’s recovery potential.”The bigger they are, the harder they fall,” goes the saying, and Tesco is certainly falling hard.

Latest City estimates have the firm’s profit for the year ending in February 2016 down around 50% since the peak achieved in February 2012 — over four years, earnings will have halved. No wonder the share price, at 230p, is down about 52% from the 480p or so it reached at the end of 2007.

What will catalyse a recovery?

It’s hard to see a strong factor ahead that could drive a profit recovery at Tesco. The firm’s bloated British supermarket estate is starting to look like a drag on the business as all the perky growth in the industry seems to be in alternative business areas such as the convenience-store market and internet sales. Even the firm’s international businesses no longer seem to brim with growth potential. Overseas trading is tough, and overseas ‘assets’ could quickly become overseas ‘liabilities’.

When any firm gets so big that it dominates its industry, the path of least resistance is down. It wouldn’t surprise me if, from now on, most of Tesco’s survival strategies net-out to shrinking the firm’s operations.  

The incoming Chief Executive, Dave Lewis, has a task on his hands. He took his seat on 1 September, but Tesco’s trading statement on 29 August gave some clues about how things may go. The board slashed the interim dividend by 75% and trimmed capital expenditure by around 16% in the face of challenging trading conditions.

Engineering survival

Tesco seems set to hunker down to the task of engineering its own survival. There’s more to come with cost cutting, I reckon, much more. Assets will need to work hard for the business and, if they don’t, they must surely go, whether at home or abroad.

Tesco’s directors reckon the new Chief Executive will review every aspect of Tesco’s operations. That seems like a major task as the business model has stopped working as well as it used to. So, a focus on the basics with a view to remodelling the business seems like the end of the firm’s pursuit of growth for some time — perhaps forever…

To me, Tesco’s recovery potential looks limited, so the firm doesn’t seem like a promising capital-growth investment.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.