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Why Would Anyone Want To Invest In Tesco PLC?

Shares in beleaguered grocery giant Tesco (LSE: TSCO) have enjoyed a bumper bounce following the company’s well-received strategic update earlier this month, with buoyant investor sentiment driving the stock up by around quarter since the turn of the year.

This bubbly enthusiasm has naturally pushed the company’s P/E multiples higher in recent weeks, but to levels which I consider staggeringly poor value. Given Tesco’s worrying growth prospects I believe that the supermarket is in jeopardy of a sharp share price correction.

A poor value growth and income selection

For the year concluding February 2015, Tesco currently changes hands on a P/E readout of 20.2 times forward earnings, the result of an expected 65% bottom line decline and soaring above the benchmark of 15 times which represents decent value for money.

Even though Tesco is expected to see earnings improve to the tune of 1% and 22% in fiscal 2016 and 2017 correspondingly, the supermarket still boasts unattractive P/E multiples of 19.8 times and 15.8 times. And quite why the City’s analysts expect to see growth explode beyond next year remains a mystery given the intensifying market pressures Tesco faces.

On top of this, Tesco can hardly be considered barnstorming value for money for dividend seekers, either. The company was forced to cut the interim dividend by 75% late last summer, reflecting the precarious state of the firm’s balance sheet.

Such woes are expected to drive the total payment from 14.76p per share during the past three years to just 2.3p for 2015, and the payout is expected to remain at these levels until the close of next year at least. Consequently the grocery chain carries a paltry 1% yield for this period.

Sales problems set to persist

It is true that chief executive Dave Lewis’ action plan contained various reasons for cheer. The closure of scores of underperforming superstores and Express outlets, shuttering of its Cheshunt headquarters and divestment of Tesco Broadband and Blinkbox will help to restore some confidence in the firm’s battered balance sheet.

But the supermarket giant still has to reveal how it will turn around its ailing sales performance. Lewis announced his intention to introduce even more aggressive price slashing across the store, a strategy which admittedly appears to have helped revenues declines slow more recently — indeed, latest Kantar Worldpanel data showed sales fall 1.2% in the 12 weeks to January 4, better than the 2.7% fall recorded in December’s report and 3.7% slump in November.

Still, these measures are still failing to push sales back in the right direction, with the double-digit progress of the discounters like Aldi and Lidl continuing to erode Tesco’s share of the market which fell to 29.1% from 29.6% at the same point in 2014. And of course a programme of prolonged discounting is an expensive strategy which does nothing to improve the company’s bottom line.

With the budget chains set to expand rapidly in the coming years, and Tesco’s key growth areas of online and convenience becoming more and more congested, I do not believe that these risks are being factored into the share price at current levels.

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Royston Wild 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.