Tesco share price: can it keep rising?

Roland Head explains why he’s still bullish about Tesco plc (LON:TSCO).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in supermarket giant Tesco (LSE: TSCO) have risen 30% from the 190p low seen at the end of last year. The FTSE 100 firm’s share price has continued to climb following last week’s full-year results. I’ve been taking a fresh look at the stock. Should shareholders expect further gains, or is the firm’s recovery now complete?

A new look

Five years ago, Tesco was bloated, laden with debt, and hated by many of its suppliers. Chief executive Dave Lewis has changed all of this. He’s cut £1.3bn of costs, improved the firm’s business practices, and ditched some of its overseas operations.

To help fuel long-term growth he’s acquired fast-growing wholesaler Booker and set up a partnership with French supermarket group Carrefour. Debt levels have tumbled and the group’s profit margins and cash generation have improved sharply.

Lewis says that the firm has now met most of its turnaround goals. He’s “very confident that we will complete the journey in 2019/20.”

Two new opportunities

My colleague Kevin Godbold believes Tesco’s growth may slow as its turnaround completes. I’m not so sure. Last week’s results suggested to me there are at least two routes open to boost profits and shareholder returns.

A recent report in The Sunday Times suggested the company is working on a loyalty scheme similar to Amazon Prime. Tesco hasn’t denied this. The suggestion is that the firm’s Clubcard offering could be expanded to tempt shoppers to sign up to the group’s banking and mobile phone services. I think this could be big.

The second opportunity is for the firm to increase shareholder returns. Tesco’s strong cash generation and low debt levels suggest to me it may soon be able to return spare cash to shareholders through share buybacks or special dividends.

In my view, the outlook remains positive. Trading on 14.5 times 2020 forecast earnings with a 3% dividend yield, I view Tesco stock as fairly priced. I remain a long-term buyer.

Dull but profitable?

Like Tesco, small-cap Carr’s Group (LSE: CARR) operates a fairly dull business in a mature sector of the market. This £140m group has two divisions, agricultural supplies and engineering, with a focus on remote handling equipment for the energy industry.

Carr’s doesn’t attract much attention, but the firm’s shares have risen by more than 300% over the last 10 years. By contrast, Tesco stock is still worth 25% less than it was 10 years ago.

I see Carr’s as a stock you could safely buy and forget for another decade. The firm’s half-year results, published today, confirm that view. Adjusted pre-tax profit rose by 4.5% to £11.4m during the six months to 2 March and the interim dividend will rise by 4.7% to 1.125p per share.

Although demand for agricultural feed was lower than usual due to the warm winter, the group’s engineering division turned in a strong performance with “significant improvement in UK manufacturing” and a “major USA $8.5m contract win” for a remote handling customer.

Carr’s shares have dipped slightly today and currently trade on 10.5 times forecast earnings, with a 3.2% dividend yield. The group has stable profits and a strong balance sheet. I see this as the kind of ‘boring’ stock that could help you retire early.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head owns shares of Carr's Group and Tesco. The Motley Fool UK owns shares of and has recommended Amazon. 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »