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Why I believe the Tesco share price could soon return to 300p

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It looks as if the Tesco (LSE: TSCO) share price is on offer right now. Shares in the UK’s largest retailer have plunged, in line with the rest of the market over the past few weeks.

However, while other companies are struggling in the current environment, Tesco appears to be thriving.

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Tesco share price recovery

Figures suggest UK consumers have increased their food buying by more than 60% year-on-year in the past few weeks. As the largest food retailer in the UK, Tesco could benefit disproportionately from this.

What’s more, management estimates the government’s business rate tax holiday will boost the group’s bottom line by around £500m this year. For some comparison, last year the company earned a total net profit of £1.3bn.

Unfortunately, it’s not all good news for the Tesco share price. Disruption to operations from staff sickness, as well as the extra costs of hiring thousands of new staff to deal with the increase in demand, will hit the bottom line. The retailer has increased the size of its workforce by a staggering 10% over the past 10 days.

It’s also likely the group’s Booker wholesaler division has seen a significant drop in demand. The business primarily caters to small businesses in the leisure sector. As the government has ordered most of these operations to shut up shop to contain the spread of the coronavirus, Booker may be struggling.

That said, Tesco’s logistics network is second to none, and some of the retail sector’s most experienced minds are in charge of operations. This implies the group could have worked to offset falling demand in one section of the business by shipping goods to other stores.

Undervalued

We’ll have to wait and see what the impact of the above will be on Tesco’s bottom line. However, at this stage, it looks as if the company might come out from this crisis in a better position than it was at the end of 2019.

On top of the tax break and demand boost, Tesco is also in the process of selling its Asian business. The £8bn deal will shore up the group’s balance sheet, and management has even hinted at a £5bn special dividend. That suggests investors are in line for a special payout of around 20p per share.

After recent declines, Tesco share price is trading at a price-to-earnings (P/E) ratio of 13.4. That’s compared to its five-year average of around 20.

Based on current City earnings estimates, if the Tesco share price returns to a P/E of 20, it could be worth as much as 340p. These estimates could unstate the firm’s potential at this stage. Including the 20p special dividend, this suggests the stock has an upside of 63% from current levels.

So, if you looking for a defensive, undervalued investment, it could be worth taking a closer look at Tesco.

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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.