The Motley Fool

Why I still see the Tesco share price as one to be avoided

Image source: Getty Images.

There’s no doubt that Tesco (LSE: TSCO) is a leaner, fitter operator than it’s been for some years, and its share price reflects that with a gain of 19% over the past 12 months (compared to a 6.5% drop in the FTSE 100).

But that comes after 2018’s earlier optimism has started to fade, culminating in an 8.5% share price dip on the day of the supermarket giant’s interim results on 3 October.

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 reported generally positive figures across the board, with sales up 12.8%. And a 67% hike in the interim dividend, while taking it to only a modest 1.67p per share, is a move in the right direction.

Margins tight

But operating profit didn’t sparkle, falling by 6.5% in reported terms, and by 1.4% on a “retail operating cash flow” basis. That’s important to me, as it puts the focus where it needs to be — on the fact that this is a very low margin business, whatever margins chief executive Dave Lewis is aiming for.

It’s also reinforced by the opening of Tesco’s new cut-price chain Jack’s, named after company founder Sir Jack Cohen, which aims to compete head on with Lidl and Aldi. But for me, that raises a couple of questions. Why can’t Tesco just compete with them anyway? And why has it taken so long to address the only thing that really matters in the groceries business?

That brings me to why I just wouldn’t buy supermarket shares, whether it’s Tesco, Sainsbury, or Morrisons (or even Aldi or Lidl, if they were available).

Poor differentiation

I see the groceries business as a fine example of economic efficiency. It’s occupied by a number of players of various sizes, all offering essentially the same interchangeable goods with little or no real differentiation — it matters nothing to me what label is on a can of whatever I’m buying, and that’s increasingly the case with hard-pressed shoppers.

And, with a few exceptions, they are increasingly competing only on price. Even Sainsbury, which has long prided itself on offering a slightly upmarket service, is aiming for a merger with Asda to help get prices down.

Competitive advantage

But while it’s great for consumers, an economically efficient market is perhaps not what investors should do best from. What we should prefer, surely, is a market with significant product differentiation and with clear defensive positions — the kinds of things that provide the best companies with significant market advantage over their competitors, and so support higher margins.

It’s also largely why I’ve never invested in airlines. In the most part, they offer exactly the same service and compete only on price. I know some, like easyJet, have done very well — but in the decades I’ve been investing, very few have really been big successes.

Time will tell

Tesco’s recent progress has been looking good now that it has been doing the big things — the purchase of Booker Group wholesaler was a particularly canny move, I reckon. But it’s the small things over the coming years that will matter, the day-to-day competition on price.

And on that score, I don’t see any significant attraction in Tesco over anyone else. 

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Alan Oscroft 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.

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.