The last few years have been filled with change for Tesco (LSE: TSCO). The company has begun the transformation which will see it become a UK-focused food services and retail business. While painful in the short term, this has the potential to thrust its share price higher over the long run.
Within a UK retail sector that is subject to deteriorating level of investor sentiment, though, its stock price seems to be undervalued. However, it’s not the only retailer which could be worth buying within an ISA today. Reporting on Wednesday was a stock that could deliver high capital gains.
The company in question is SCS Group (LSE: SCS). It is a retailer of upholstered furniture and floorings and released interim results which showed that its performance has been mixed. In the 26 weeks to 27 January, the company was able to achieve like-for-like (LFL) order intake growth of 2.2%. This is impressive in a tough retail environment, with the company’s focus on choice, value and quality helping it to outperform some of its peers.
However, in the seven weeks from 27 January to 17 March, the company’s performance has disappointed. LFL order intake has fallen 5.3%, which is likely to be the key reason for the stock’s 5% fall in value following the release. However, the decline in sales growth has been partly caused by adverse weather conditions, so the underlying performance is likely to have been stronger.
Of course, SCS faces a difficult outlook. Consumer confidence in the UK remains at a relatively low ebb, and this could mean that its sales and profitability come under pressure over the medium term. However, with a price-to-earnings (P/E) ratio of just 8.6, it seems to offer a wide margin of safety and excellent value for money.
Those same difficult trading conditions are likely to impact negatively on the supermarket sector. However, with all of the changes Tesco is making to its business model, it may able to offset these difficulties to at least some extent. For example, its focus on efficiency and improving customer service may lead to a strong performance when it comes to profitability.
In fact, the company is forecast to post a rise in its bottom line of 25% in the current year, followed by further growth of 23% next year. This shows that a recovery is very much on the cards and with the stock trading on a price-to-earnings growth (PEG) ratio of just 0.6 it seems to have significant capital growth potential.
Certainly, its share price performance may disappoint in the short run. Increasing competition from Aldi and Lidl could eat away at its market share. But with a strong management team and the acquisition of Booker, it seems to be moving towards an improved level of profitability which may filter through to a higher share price.
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Peter Stephens owns shares of Tesco. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.