Brexit could prove disruptive in the short term — to a greater or lesser degree, depending on the terms of the divorce. But in the long term, I expect the UK to prosper economically whatever the outcome. Great British businesses, whether domestically-focused or multinational, will continue to thrive and deliver for their shareholders.
Here at the Motley Fool, our abiding philosophy is to invest for the long term. Instead of worrying endlessly about external uncertainties over which we have no control, we suggest investors focus on finding strong businesses, trading at attractive valuations. We believe this combination of qualities is likely to lead to handsome long-term returns.
I believe FTSE 100 supermarket giant Tesco (LSE: TSCO) fits the bill right now. And I’ve also been looking at a small-cap company, Finsbury Food Group (LSE: FIF), which released its half-year results today. This speciality baker manufactures cake, bread and morning goods for the retail and foodservice channels, and counts Tesco among its customers.
Playing out as planned
Tesco was a mess when Dave Lewis took over as chief executive in September 2014. The former Unilever man said there’d be no quick fix, but promised his strategy would lead to long-term sustainable growth. The group has now delivered 12 consecutive quarters of like-for-like growth in its core UK business, and the turnaround is very much playing out as planned.
Furthermore, while Sainsbury’s plan for a mega-merger with Asda has fallen foul of the Competition and Markets Authority, Tesco’s acquisition of Booker is looking a shrewd move. Indeed, I believe the growth opportunities of the combination could be more substantial than some analysts have pencilled in.
However, even as City consensus forecasts stand, a share price of 222p looks generous for the growth on offer. The forward 12-month price-to-earnings (P/E) ratio is 13.1 on a forecast increase in earnings per share (EPS) of 21%. This gives a price-to-earnings growth (PEG) ratio of 0.62, which suggests the stock offers very good value.
With a prospective 3.3% dividend yield also on offer, I’d be happy to buy into the unfolding growth and income story at Britain’s biggest supermarket group.
Now a lot cheaper
Most of the various revenue and underlying profit numbers in today’s half-year results from Finsbury Food were between up-a-bit and down-a-bit. Management described the performance as “robust” in “a challenging market.” The latter included “continued increased commodity prices alongside wider macro pressures.”
On the outlook, the company said: “Whilst there is no doubt that the wider market pressures will continue in the period ahead, our market position is solid and we are well positioned both now and for the longer term.”
The situation was much the same when I wrote about Finsbury this time last year. I described it as a decent, well-managed business, but felt that a share price of 116p, a forward P/E of 11.6 and prospective dividend yield of 2.8% weren’t sufficiently attractive for a company having to work hard to more or less stand still.
However, the share price is now down to 80.5p, the forward P/E is down to 7.6 and the dividend yield is up to 4.5%. I’m inclined to rate the stock a ‘buy’ today, with the dividend providing decent compensation, while awaiting a potential strong rise in the share price when cost inflation and those “wider macro issues” ease.
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G A Chester 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.