Why I believe the Tesco share price could soon return to 380p

Over the last five years, the highest level at which Tesco (LSE: TSCO) has traded is 380p. It reached this level in 2013 and has been unable to trade even close to it ever since.

Of course, the last five years have been tough for the company and the wider retail industry. But with a new strategy and an improving outlook, the stock could return to its five-year high. As such, it could be worth buying alongside one of its industry peers.

Bold changes

The changes made by Tesco in the last five years have been bold and somewhat uncompromising. The current management team has largely undone the work which was undertaken towards the end of Sir Terry Leahy’s period in charge and during the time in which his successor Philip Clarke was CEO of the company.

For example, the business has scaled back its international focus, exiting a number of markets in favour of its core UK operations. It has also ended the desire to branch out into new industries and has instead focused on its food operations. Both of these changes have helped to make it more competitive at a time when the UK supermarket sector has become increasingly crowded and shoppers have become more demanding.

Improving outlook

A focus on efficiency and customer service seems to be improving margins and winning back previous customers. Tesco has reported nine consecutive quarters of sales growth, while its margins continue to move upwards. This could prove to be a potent combination and is the key reason why its bottom line is expected to be 42% higher in 2020 than it was in the 2018 financial year.

Even though the company has significant growth potential over the next two years and in the years following 2020, due in part to the integration of Booker, investor sentiment remains uncertain. The stock trades on a price-to-earnings growth (PEG) ratio of 0.8, which suggests that a 52% rise in its valuation to 380p per share would not be unreasonable.

Improving prospects

Also offering upside potential within the food services arena is Cranswick (LSE: CWK). It reported encouraging full-year results on Tuesday, which showed that revenue increased by 12.7% on a like-for-like (LFL) basis. The business was able to generate a rise in adjusted profit before tax of 22.4%, increasing to £92.4m. And with capital expenditure of £59m being at a record level, it remains committed to adding capacity, extending its capabilities and driving further efficiencies through the business.

With Cranswick expected to report a rise in earnings of 5% this year and 7% next year, it appears to offer an attractive growth outlook. It has been able to generate positive earnings growth in each of the last five years, which suggests that it is a robust and consistent business. Should market volatility increase in future months, it may therefore prove popular among investors.

Certainly, the company’s price-to-earnings (P/E) ratio of 23 is not the lowest in the FTSE 250. But with a solid business model and growth potential, it appears to offer upside potential.

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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.