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Why I think the Tesco share price is cheap! Time to buy?

The Tesco (LSE:TSCO) share price has rebounded from an earlier slump to gain 20% this year. Is it a convincing buy? With shares trading at only 14 times forward earnings, now is one of the cheapest times in the last five years to pick up the Tesco share price.

The FTSE 100 giant certainly has the market’s confidence, with zero, I repeat zero, funds shorting the stock, according to shorttracker.co.uk.

Half-year results are due out on 2 October and this raises the prospect of short-term gains for investors. Tesco has outstripped market estimates for both revenue and earnings in four of the last eight sets of results.

Of course, we can’t predict the future, and it’s bad practice to jump in on shares before we know the nitty gritty of revenue or earnings per share.

One thing I would note is that there are much better dividend payers out there for income investors.

Supermarket sweep

Tesco tends to divide the investing crowd because it is not growing as fast as its competitors. The idea is that Tesco’s dominating position as UK market leader means there is less room for growth and hence less space for the share price to increase.

The latest market research by Kantar Worldwide seems to bear this out. Tesco is way ahead, serving 26.9% of all UK customers, but its smaller, more innovative rivals are improving much more quickly.

This data shows that in the 12 weeks to 9 September, Lidl produced a 9.2% increase in revenue and crossed a 6% UK market share for the first time. By contrast, Tesco saw sales dip by 1.4% across the same period, suffering a 0.5% loss in market share.

Another major issue the Tesco share price faces is a weak pound, exacerbated by Brexit dragging on. This is a concern because it means the vast amount of food the supermarket imports will cost more, putting pressure on profits.

Can’t bank on it

In the past, its Edinburgh-headquartered banking arm Tesco Bank has come to the rescue of Tesco’s weak results. But the bank’s second-quarter 2019 trading update showed sales down 1.9%.

And while the £3.8bn sale of its mortgage business to Lloyds represented a 2.5% mark-up on the book value of the loans, and certainly adds cash to the coffers, that’s 23,000 customers no longer on its books.

Further ahead

The expansion into Asia is looking more positive, with Tesco reporting a 7.3% sales hike in its China, India, and Malaysia stores across the second quarter of 2019.

Looking to the medium term, I think Tesco’s investment in checkout-free stores à là Amazon Go will help drive down costs and free up cash flow. Tech improvements to slash energy costs by investing in better refrigeration are welcome, although what impact they can make on the business will be limited.

Again — I’m not sure where Tesco is going to find new growth from at the moment, which troubles me.

City analysts think earnings per share will be more than 17% ahead of last year even as revenues are predicted to stay flat at just over £31.7bn.

I would wait to see the results. If the supermarket outperforms again, I think the Tesco share price will make more sense.

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Tom owns no 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.