The Motley Fool

Is Tesco’s share price a bargain after this news?

Back in February, it was reported that Tesco (LSE: TSCO) had a ‘secret plan’ to develop a new discount grocery chain. The UK’s largest supermarket was taking such measures in an effort to stop the migration of its customers to the German discounters Aldi and Lidl.

Fast forward seven months and Tesco has just unveiled its new low-price chain, which is named Jack’s. So, what are the details and how does this development affect the investment case?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Tesco’s new discount chain

Tesco’s new Jack’s stores will sell around 2,600 ‘essential’ items, of which around 1,800 products will be own-branded products – a format similar to that of the German chains. The stores will be a mixture of entirely new sites, converted Tesco stores and sites adjacent to existing Tesco stores. While the first two stores will open today in Chatteris and Immingham, the group is only planning to open 10-15 in the next six months, although it does have the option to open more if things go well.

Does this news impact the investment case for Tesco? No, in my view. To be honest, I don’t think Aldi and Lidl will be too concerned about 10-15 Jack’s stores. To put that number in perspective, Lidl opened its 700th store in the UK earlier this year and has plans to open 50 new sites this year, while Aldi currently has over 750 stores in the UK and plans to have more than 1,000 by 2022.

In my opinion, Tesco shares still look slightly overpriced at the current price. With analysts expecting the group to generate earnings of 14.1p per share this year, the stock’s forward-looking P/E ratio is 16.7 at present. I don’t see much value there when you consider how competitive the industry is right now. Similarly, Tesco’s prospective dividend yield of just 2.1% does not offer much appeal when you consider that the median FTSE 100 forward-looking yield is 3.6%. As such, I believe Tesco remains a share to avoid for now.

Sainsbury’s

What about rival Sainsbury’s (LSE: SBRY)? Is that a stock worth buying?

Well, there was news here yesterday too, with the Competition and Markets Authority (CMA) advising that it is referring the proposed merger with Asda for a further “in-depth” investigation. Having completed its Phase 1 investigation into the merger, the CMA stated that the deal “raises sufficient concerns” to be referred for a deeper review as there is plenty of overlap between Sainsbury’s and Asda stores, meaning that shoppers could potentially “face higher prices or a worse quality of service.”

So, right now there’s a fair bit of uncertainty as to whether the deal with Asda will go ahead. As such, I believe it’s worth waiting to see how things play out, before making a decision on the shares. With the stock up 32% year-to-date and currently trading on a forward P/E ratio of 15.2, there’s risk to the downside if the deal falls through, in my view.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Edward Sheldon has no position in any 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.