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Is Tesco’s share price about to return to 300p?

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It’s been almost four (long) years since shares in Tesco (LSE: TSCO) — the UK’s biggest supermarket by market share — traded above the 300p level. Based on today’s final results, however, I suspect it won’t be long before this is breached.

Massive rise in profit

Hailing “another strong year of progress“, this morning saw the company revealing an almost 800% rise in pre-tax profit to £1.3bn compared to just £145m the year before.

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Sales rose 2.3% (or 0.6% at constant currency) to £51bn with the company registering its ninth consecutive quarter of like-for-like growth in Q4.

Despite the ongoing battle with German discounters Lidl and Aldi, the Welwyn-based business welcomed 260,000 more customers through its doors with like-for-like sales in the UK rising 2.2% thanks to “consistent strength” in fresh food. Operating margins also increased to 3% in the second half of the financial year, allowing the retailer to remain confident that it will achieve its target of 3.5%-4% in 2019/20.

Tesco’s balance sheet is beginning to look far more robust with net debt falling just under 30% to £2.63bn. The FTSE 100 constituent’s total indebtedness now stands at £12.3bn — £4.4bn lower than in the previous year. 

Over the year, Tesco achieved cost savings of £594m, bringing the total amount to date to £820m — well over halfway towards its £1.5bn target over the medium-term. Positively, the completion of its merger with wholesaler Booker in March should lead to savings of “at least” £200m a year, the company estimates.

Commenting on results, CEO Dave Lewis — brought in to steady the ship during following its infamous accounting scandal and general loss of focus — said that today’s numbers put Tesco “firmly on track” to meet its targets over the medium term. The brand was now “stronger“, he enthused, with more shoppers recognising the improvements made over the last few years. Based on these numbers, it’s hard to disagree.

Now a buy?

Since June last year — and taking into account this morning’s favourable reaction from the market — Tesco’s shares have climbed an encouraging 34%. Although future performance will be decided by a myriad of factors, including the health of the UK economy in general, I think there could be more to come.

According to the latest data from Kantar Worldpanel, Tesco continues to outperform rivals such as Sainsbury’s and Asda while also arresting the fall in its market share, which still stands at a commanding 27.9%. With the capture of Booker now allowing the company to sell its own goods in Budgens and Londis convenience stores, I continue to think the £20bn cap is a far safer bet than any of its listed industry peers.

The resumption of dividend payments to holders is a further incentive for market participants to reconsider the stock. As a result of recent stellar performance and management’s confidence in the future, Tesco declared it would award a final dividend of 2p per share, bringing its total dividend for 2017/18 to 3p per share. While only representing a yield of 1.35% based on today’s share price, analysts have already pencilled in a 71% hike in the next financial year.

Bearing in mind the ongoing pressure on costs, it goes without saying that the grocery market will remain as tough as ever going forward. Nevertheless, today’s upbeat news does suggest that Tesco’s revival is almost complete.  

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Paul Summers has no position in any of the shares mentioned. 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.

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