The last time I covered Tesco (LSE: TSCO) back in late September, the shares were changing hands for just under 240p. Fast-forward to today, however, and the share price has slumped to 212p, a fall of more than 10%, after investors dumped the stock when half-year results were released in early October.
At the current share price, Tesco trades on a forward-looking P/E ratio of 15.2, and offers a prospective dividend yield of 2.4%. Is that good value?
Directors are loading up
One thing I like to monitor when analysing stocks is director purchases. The theory goes that top-level directors such as CEOs and CFOs tend to have the most information about their own company’s future prospects. Therefore, if they are buying company stock themselves, it’s a bullish signal.
Applying this theory to Tesco, the picture certainly looks interesting, as several top-level directors – including CEO Dave Lewis, CFO Alan Stewart and Chairman John Allan – have been buying up stock in October and taking advantage of the recent share price fall. Indeed, Lewis and Stewart purchased 50,000 Tesco shares on 5 October, spending £107,000 each, while Allan bought 22,000 shares over 3-4 October, spending nearly £50,000.
I see these director purchases as a positive development as they suggest that management is confident about the future. If top-level insiders at Tesco are reaching into their own pockets and buying shares, they clearly expect the share price to rise from here. But is this bullish signal enough to make me want to buy the shares?
Not yet, I’m afraid, looking at the stock’s valuation. While recent half-year results showed that the company is definitely heading in the right direction, the stock’s forward P/E of 15 doesn’t quite offer enough value for me when you consider the difficulties Tesco is likely to continue facing from its competition. I’m also not seeing much appeal from a dividend-investing perspective, as Tesco’s yield is still quite low. So, while Tesco does appear to be getting its act together, and the director purchases are a positive sign, I’m not a buyer of the shares yet.
Better value here
One FTSE 100 company I do think offers strong value right now is packaging specialist Mondi (LSE: MNDI). Its shares trade on a forward P/E of 11.4, and sport a yield of a healthy 3.6%.
Packaging is a theme that, to my mind, offers vast potential in the years ahead, due to the shift to online shopping. It’s not the world’s most exciting business, sure, but when you consider that almost every online purchase requires some form of packaging, the world’s related companies look well placed to benefit in the medium to long-term.
And Mondi has momentum at present. In its half-year results in August, the group announced a 26% rise in basic underlying earnings per share, and a 12% dividend hike. A Q3 trading statement also recently advised that underlying EBITDA for the quarter was up 30% on last year. Moreover, Mondi’s dividend growth track record is impressive, with the group having registered eight consecutive dividend increases now.
The shares have been sold off recently on fears that there could be a supply glut in the US, and I think this has provided an attractive buying opportunity for long-term investors. I rate the shares as a ‘buy’ right now.
