The Best Reason To Buy Tesco PLC

tesco2Shares in Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) have crashed by nearly 40% over the past 12 months to 227p, with the latest dip coming after the UK’s biggest supermarket issued a profit warning and slashed its interim dividend by 75%.

Coinciding with the arrival of new CEO Dave Lewis, the company’s announcement told us the dividend-cutting move should “enable us to retain a strong financial position and strategic optionality” — and many people think that optionality includes squaring up for a new price war.

Falling earnings

Prior to the latest news, analysts were not convinced that Tesco’s plan was delivering the goods yet, and they had a 30% drop in earnings per share (EPS) forecast for the year to February 2015 followed by a further 9% drop the year after. What the City will make of it now remains to be seen, but there’s at least one broker already reiterating their Sell stance.

On the previous consensus, Tesco shares are on a forward P/E of around 10 now, dropping to 11 in 2016, though it’s hard to be sure what to make of that.

If EPS really is close to bottoming in the next year or two, and Tesco’s new boss and accelerated strategy actually are what it takes to get us past the point of maximum pessimism, we could be looking at a very promising recovery position.

Light ahead?

So, what positives are there for Tesco right now?

Firstly, it’s the only one that really has any international presence — 30% of its last full year’s turnover came from outside the UK, with about half of that generated in Asia. And Mr Lewis has considerable experience of building overseas markets from his time as head of Unilever‘s global personal care business. He also has a reputation for not shying away from tough decisions, so there’s unlikely to be any pussyfooting from him.

Another key Tesco strength is its online shopping offering. Being the first mover really has helped, and Tesco now commands around 45% of the UK’s online grocery business. It is still only a tiny portion of the entire market, but there’s surely massive growth to come over the next few years — and Tesco’s infrastructure, including its so-called dark stores and its distribution network, is already in place and poised to support growth.

Time for recovery?

The short term is very uncertain, for sure. But if you’re the kind of investor who likes a good recovery situation and you’re prepared to do your research on this one, I reckon there’s a good chance that in five years’ time we’ll be looking back on the second half of 2014 to the first half of 2015 as the time to have piled back in to Tesco.

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