Had you bought into Tesco (LSE: TSCO) a year ago you’d be forgiven for breaking out the bubbly, so impressive has been its share price ascent during this time.
A few years ago its position as an all-conquering hero seemed to be dead and buried. A humiliating exit from the US and Japan marked an end to its plans for global domination, while the expansion of Aldi and Lidl undermined its position as the sweetheart of British shoppers.
However, a string of excellent trading releases over the past 12 months has shown that, following the appointment of former Unilever man Dave Lewis in 2014, the country’s biggest retailer may be on the way back. Its market value has risen by almost 50% in that time.
Despite this rapid ascent, however, on paper Tesco still appears to offer incredible value to share pickers.
City brokers believe the prospect of painful earnings drops are firmly in the rear view mirror as sales stomp higher again. They are expecting profits increases of 19% and 20% in the years to February 2019 and 2020 respectively, and this means Tesco deals on a forward price-to-earnings-growth (PEG) readout bang on the accepted bargain watermark of 1.
What’s more, now would appear to be a great time for dividend chasers to pile in given the rate at which Tesco is expected to lift payouts over the medium term.
Having resurrected the dividend last year with a 3p per share reward, number crunchers are expecting the firm to lift the payout to 5.3p in the current year, yielding a handy 2.1%. And for fiscal 2020 a 7.3p dividend is forecast as the yield leaps to 2.9%.
Seizing the middle ground
Lewis deserves the plaudits for what he has achieved so far, his focus on improved customer experience and freshening up its in-store brands balanced with discounting helping to get shoppers through the door.
The latest trading release showed like-for-like sales in the UK and Ireland up 3.5% during the three months to May. At group level, sales on this basis have now risen for 10 straight quarters.
By comparison Sainsbury’s is not faring so well, with like-for-like sales almost grinding to a halt during April-June. Tesco is joining FTSE 100-listed supermarket Morrisons in cannibalising the middle ground — sales at the Bradford chain rose 3.6% on a comparable basis in the 13 weeks to May 6.
Tesco’s bounceback has been better than I had expected, but I’m not tempted to invest right now as I fear its turnaround could be running out of road.
As my Foolish colleague Kevin Godbold pointed out, the supermarket sector is ultra-competitive. Discounters Aldi and Lidl have changed the game with their low-cost offerings, and with these rapidly expanding, the threat to Tesco’s revival is likely to grow.
This is not the only reason to be scared. Amazon is stepping up its own attack on the UK grocery sector, and this could be particularly damaging for the so-called Big Four operators given the surging popularity of online shopping.
What’s more, Tesco’s dominance over Sainsbury’s could also come to an end should the planned merger with Wal-Mart‘s Asda receive the green light from regulators.
Tesco may be in a healthier position that a year ago, but I believe its long-term outlook remains really quite perilous. I for one won’t be investing any time soon.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. 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.