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I think the Tesco share price looks good value right now and here’s why

CORRECTION: The original version of this article suggested that Tesco conducted a rights issue. However, while there was speculation it would have to conduct a rights issue, this didn’t transpire.

For a while Tesco (LSE: TSCO), like Manchester United, seemed lost in the wilderness following the departure of a top manager. Just as the football mega-team struggled after the departure of Sir Alex Ferguson, the supermarket seemed to be losing its way after the departure of Sir Terry Leahy who had led it, seemingly with great skill.

The leaner years after his departure saw the supermarket find a massive black hole in its accounts, pull out of a failed venture in America and lose market share as discounters such as Aldi and Lidl arrived and aggressively competed in its main UK market.

Times have changed

Those dark days now seem to be fading. The misdemeanours of yesteryear are being replaced by a series of wins, such as the tie-up with Carrefour and the acquisition of wholesaler Booker.

Compare Tesco to rival Sainsbury’s and you see the peers are a long way apart. The latter pursued a high-risk merger strategy with Walmart-owned Asda to try to overtake Tesco and it failed. Now the shares seem to be the poor relation of the supermarkets sector, although it does mean they now have a superficially attractive P/E of only nine. Tesco shares have been doing much better and to me look good value at the current price, despite the higher P/E of 17. The Morrisons share price looks too expensive though, even with its tie-ups with Ocado and Amazon and other seemingly positive news for that supermarket. Despite recent share price falls, it still has a P/E of nearly 20. 

Tesco’s share price, currently around 230p may be down around 12% over the past 12 months, but this year it has been recovering while Sainsbury’s and Morrisons over the period are down 38% and 20% respectively.

The results

It is easy to see why Tesco is on the rise. The latest results from the supermarket show that it is managing to grow in the UK and Ireland – albeit by just a tiny percentage. First-quarter sales grew 0.8%, showing that Tesco is managing to at least hold its own against the discounters. The biggest contribution came from Booker, underlining the wisdom of that acquisition. In that business, like-for-like sales grew 3.1% versus the previous year. Overseas markets, for Tesco as a group, were a drag on performance however, with sales in Central Europe falling nearly 5%.

The Q1 performance follows on from 2018/19 results which were ahead of expectations and showcased just how far Tesco has come since its darkest days. Group operating profit for the full year rose by 34% while the dividend increased by 92%. Again, the UK and Ireland saw growth while overseas markets fared less well. Any turnaround therefore in Central Europe and better sales in Asia could boost the group and should add value for shareholders.

I think the progress being made at Tesco under Dave Lewis makes the shares good value now. Although it does not have an especially low P/E, with Tesco’s dominant market share, opportunities to expand Booker and its new discount store chain Jack’s, and the potential for more links like the one with Carrefour, there could be a lot more growth to come from the supermarket.

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Andy Ross 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.