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Why You Should — And Shouldn’t — Park Your Cash In Tesco PLC

Today I am looking at the pros and cons of loading up your stocks trolley at Tesco (LSE: TSCO).

Sales slippage drags on and on

Question marks clearly remain over Tesco’s ability to bounce back and dominate an increasingly fragmented grocery market. The Cheshunt-headquartered business gave investors a welcome boost last month following news of a recent sales improvement during March-May, and a 1.3% fall in like-for-like UK sales marked an improvement from the 1.7% decline punched in the previous quarter.

However, a decline is still a decline, of course, and Tesco is quite literally paying a huge price to even attempt to stand still. Indeed, like-for-like volumes actually advanced 1.4% during the latest three-month period, underlining the battle the firm has on its hands to ward off the likes of discounters Aldi and Lidl. Tesco needs to show more than just persistent, and expensive, price-slashing to get the checkouts beeping happily again.

Pixel purchases provide huge potential

More optimistic investors will point to Tesco’s pride of place in the sweet spot of online retailing as a significant ray of sunshine in an otherwise murky landscape. Last month research tank IGD estimated that some £17.2bn worth of groceries will be purchased through the internet by 2020, up 10% from present levels.

It is no secret that Tesco still has to work out what to do with its broad portfolio of underperforming megastores, not to mention how to breathe new life into its convenience stores, once seen as a hot revenues generator but where sales are now moderating. But the foodseller is by far Britain’s biggest and most successful online retailer, and with Tesco steadily rolling out improvements to its virtual service, it could easily steal a march on its rivals in this increasingly-lucrative area.

The price is right?

Still, it could be argued that the massive uncertainty created by worsening price deflation makes Tesco and its listed peers a highly-risky pick. One would naturally expect a firm with huge earnings obstacles to be trading on a P/E multiple close to the bargain benchmark of 10 times or below.

But although Tesco has seen its stock price experience a mild decline more recently, the business still changes hands on a huge earnings ratio of 24.9 times for the year concluding February 2016, thanks to expectations of a 7% earnings decline. And with the retailer’s rivals all embarking on massive expansion programmes to hammer the grocery giant while it’s down, I believe Tesco’s stock price remains hard to merit given the lack of outstanding growth drivers, leaving it vulnerable to a significant correction further down the line.

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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.