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Will the Tesco share price ever return to 400p?

During the past 10 years, shares in Tesco (LSE: TSCO) have been on a roller coaster ride. In the year after the financial crisis, shares in this global retailing behemoth jumped from around 300p to as much as 450p, although they struggled to return to the all-time high of 484p. 

The shares then moved sideways for a couple of years before collapsing in 2012. They fell even further over the next few years as profits plunged and the company became embroiled in an accounting scandal. The stock continued to decline until the end of 2015 when it hit a low of 143p.

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The turnaround begins 

After bringing in a new CEO and overhauling the entire business, removing thousands of jobs in the process, it finally looks as if investors can trust Tesco again. 

Indeed, some investors have already started to return as the stock is up 59% from the low printed back in 2016. And after eliminating its dividend to investors at the end of 2015, towards the end of 2017, management felt confident enough to reinstate the payout. Although the dividend is still a fraction of what it was before the cut, analysts are expecting rapid growth in the years ahead.

Unfortunately, even though analysts have pencilled in dividend growth of more than 100% over the next two years, from 3p per share to 7.3p per share, this will still be around half of what it was in 2014. That year the company paid out 14.8p per share before cutting the distribution by 92% in 2015, and then eliminating it in 2016. 

The group’s profit projections are a bit more impressive. Current estimates suggest Tesco will report a net profit of £1.7bn and earnings per share of 16.9p in 2020, which is pretty remarkable considering its record over the past six years. Between 2013 and 2018 the firm reported total net losses of £3.5bn.

Still, even after factoring in this impressive turnaround, I can’t see the shares returning to 400p anytime soon. Based on current analyst expectations, shares in Tesco are trading at a forward P/E of 13.5 for 2020, which seems about right considering the group’s growth prospects. Based on these numbers for 2020, the stock is trading at a PEG ratio of 1.08.

Growth takes time 

That being said, while I can’t see the shares returning to 400p in the near term, over the longer term I reckon there is a good chance the Tesco share price could rise above 300p

The company has been growing earnings per share at a rate of around 20% per annum for the past few years, which is clearly unsustainable. However, management is still cutting costs across the group, and sales growth has returned. Last year, Tesco reported its highest sales growth over the Christmas period since 2009. 

Like-for-like sales increased by 2.2% compared with the same period in 2017. If this continues, Tesco could see earnings growth between 5% to 10% per annum in the years after 2020/21. 

If earnings growth does average 10% per annum, I reckon the group could earn 22.8p by 2024, which might justify a share price of 308p, assuming an earnings multiple of 13.5. This is only a rough forecast, but I think it shows the potential company has over the next few years.

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Rupert Hargreaves owns no share 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.