I originally came here to bury grocery chain Tesco (LSE: TSCO), not to praise it. My planned headline was Is the Tesco share price about to crash below 200p? This was intended as a riposte to a bullish piece by Rupert Hargreaves, who reckons the Tesco share price is set to climb to 300p.
Having taken a closer look at Tesco’s prospects, I can’ t justify such negativity. Of course, its share price could easily crash below 200p (you never know what lies around the corner), but it has a surprising amount going for it at the moment, given tough background conditions.
I’m a long-standing admirer of boss Dave Lewis. He has spearheaded a tenacious comeback after the great Tesco meltdown. Investors fled amid falling sales, alienated customers, no dividends, the 2014 accounting scandal and Brexit. But now they’re back.
Tesco outperformed the market over the crucial Christmas period and has posted an impressive 12 consecutive quarters of growth, which analysts expect to hit 13 when it reports its full-year results on Wednesday.
Lewis’s move to buy Booker also looks to be paying off as latest figures showed strong like-for-like growth of 10.7% in the third quarter, excluding tobacco, and 8.2% over Christmas. Its ‘Festive 5’ vegetable offer showed that Tesco is no turkey, although it still has plenty of work to do reshaping its Irish, Polish and Asian businesses.
Tesco’s share price is up almost 20% in the last three months, partly due to its own efforts and partly due to the wider stock-market revival. At time of writing, its stock trades at 237p. In the longer run, I expect it to go higher rather than lower, but the short-term, as ever, is anybody’s guess.
So well done Tesco. Yet there’s always a but. Latest figures from Kantar Worldpanel for UK grocer market share show that Aldi and Lidl continue to chip away at the Big Four’s share, with Tesco falling from 27.6% to to 27.4% over the last year (Sainsbury’s was hit harder). Aldi and Lidl continued to grow with 10.6% and 5.8% increases in year-on-year sales. Their share of the grocery market is now 8% and 5.6% respectively.
However, Tesco enjoyed the strongest growth of the four main players, up 0.5% over Kantar’s 12-week period. City analysts are upbeat about the future, anticipating earnings per share growth of 33% in the year to 28 February 2019, followed by 21% and 12% in the two years after that.
Tesco is steadily repairing its dividend and although it yields just 1.3%, that is forecast to hit 3.1% shortly and 3.9% by 2021. The share price still looks right, trading at 13.6 times earnings, with a PEG of 0.7 and a price-to-sales ratio of just 0.4. It’s a shame operating margins remain wafer thin at just 3.2%. Tesco still has work to do on that front. We will find out more on Wednesday.
Analysts expect Tesco to report operating profit before exceptional items of more than £2bn, up 27% from £1.64bn. There are solid reasons why some believe it could be the bargain stock of the year.
Harvey Jones 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.