Although the outlook for a number of FTSE 100-listed retail shares may be uncertain at the present time, Tesco (LSE: TSCO) appears to have significant growth potential. It is due to post a rising bottom line over the medium term, with its strategy appearing to be working well.
With its shares offering a margin of safety, they could generate an improving level of capital growth in the coming years. As such, it could be worth buying right now, with it having the potential to help investors to overcome a rising State Pension age.
In fact, relative to a number of other stocks, the retailer could offer excellent value for money. One example of a company which appears to be overvalued given its growth outlook is industrial inkjet technology specialist, Xaar (LSE: XAR). It released a disappointing trading update on Monday which showed that it expects to increase inventory and debtors provisions by £7m. Previously reported delays in the ramp-up of new product volumes in China have caused an unfavourable working capital ageing profile.
Looking ahead, the company is forecast to post a fall in net profit of around 5% in the current year. Despite this, it trades on a price-to-earnings (P/E) ratio of 20, which suggests that it lacks a margin of safety. It also indicates that investors have not yet factored in its uncertain future, which could mean that its shares experience further challenges in the near term. As such, now may be a time to avoid Xaar, with its disappointing growth outlook and high valuation making it relatively unappealing.
By contrast, Tesco offers an impressive growth outlook. Even though consumer confidence in the UK is weak ahead of Brexit, the stock is expected to post a rise in net profit of 20% in the current financial year. Investors do not appear to have factored in such a high rate of growth, with the company’s shares having a price-to-earnings growth (PEG) ratio of just 0.8. This makes it one of the cheaper FTSE 100 retailers at the present time, which may mean that it is able to outperform many of its industry peers.
One potential threat facing the company is competition. In recent years the business has sought to focus on the UK supermarket segment, which is becoming increasingly crowded. This trend is likely to continue as many of its smaller rivals are set to open a number of new stores over the next few years. Alongside shoppers who are increasingly price conscious, this may not create favourable operating conditions for the business.
However, with a low valuation and a strategy that aims to adapt, while also improve efficiency, the future prospects for Tesco seems to be strengthening. As such, it could offer growth potential which helps to boost an individual’s long-term retirement plans as the State Pension age rises.
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Peter Stephens owns shares of Tesco. 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.