Is Tesco (LSE: TSCO) the brilliant investment opportunity that rampant investor appetite suggests it is? Well, despite strong buying that has seen its share value leap more than 30% over the past year, I’m yet to be convinced.
Sure, thanks to the anticipated 19% earnings rise for the year to February 2019, the FTSE 100 supermarket deals on a bargain-basket, sub-1 prospective PEG reading of 0.9.
But, as my Foolish colleague Alan Oscroft recently suggested, the turnaround efforts of chief executive Dave Lewis may have proved impressive. But the argument that Tesco’s transformation may be running out of road is compelling.
Latest Kantar Worldpanel data certainly suggested an ongoing threat to Tesco’s recovery. This showed that while sales at the chain rose 1.8% in the 12 weeks to August 12, the ongoing customer grab by cut-price specialists Aldi and Lidl, the supermarket saw its market share fall 50 basis points to 27.4% year on year. And the global expansion of these chains promises to keep the likes of Tesco on their toes.
Now Royal Mail (LSE: RMG) isn’t without its fair share of risk either.
As challenging economic conditions in the UK could force more and more grocery shoppers into the arms of the German discounters, a worsening domestic economy could also weigh on Royal Mail’s domestic operations in the near term. What’s more, the terminal decline in the letters market is another gauntlet that the centuries-old courier has to get past.
I’m confident that the Footsie business can rise to the challenge, however. Not only because of the brilliant opportunities that the e-commerce segment throws up (latest data from the British Retail Consortium showed online’s take of total British retail sales rose to 23.2% in August, from 21.4% a year earlier), but because of its exciting foreign expansion plan as well.
I’ve touched upon the excellent earnings potential of its pan-European GLS division before, and now Royal Mail is casting its net even further afield. This month, it bought Canadian business-to-business parcel delivery giant Dicom Canada for £213m, a company with a vast footprint in the provinces of Ontario and Quebec which collectively account for almost 60% of Canada’s entire GDP.
A better long term selection
Royal Mail can also be picked up for next to nothing today, the firm sporting a forward P/E ratio of 12.2 times, below the accepted value watermark of 15 times and below. What’s more, it also carries a mighty 5.3% dividend yield, smashing Tesco’s corresponding reading of 2.2% to smithereens.
A warning, however. The parcels play is expected to endure a 15% earnings drop in the 12 months to March 2019, reflecting those aforementioned troubles in the letters market. Still, the City is expecting the firm’s recovery to kick in with a 3% profits rise in fiscal 2020, a period in which the dividend is expected to rise again and thus push the yield to 5.6%.
Recent newsflow may not have been as encouraging over at Royal Mail when compared to that of Tesco, and this trend may continue for a little longer. That said, I remain convinced the courier’s long-term outlook is vastly superior to that of the supermarket. And for that reason, I’d much rather buy Royal Mail today.
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Royston Wild 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.