Tesco (LSE: TSCO) looks set to end the year ahead of the FTSE 100. The supermarket giant’s share price is down 12.5%, just three points ahead of the Footsie’s 15.5% loss. But if Tesco isn’t ahead by 31 December, the chances are it’s going to be very close.
I really thought Tesco’s year-end position would be significantly better than this. Supermarkets were among the essential traders that didn’t have to close during the Covid-19 lockdowns. Shopping practices were restricted though. And a lot of people will have held back on their spending while focusing on essentials.
But Tesco has been very flexible with opening hours in response. Still, analysts expect full-year revenue to drop around 9% for the current year. And earnings look set to fall by around a third. Tesco’s profit margins have been squeezed by the extra costs caused by the pandemic. And that has to hurt the Tesco share price.
Tesco share price lagging?
But there’s a rebound forecast for next year, which would take Tesco back close to pre-Covid earnings. It would put the shares on a P/E of only around 12. For the leader in the UK’s FTSE 100 supermarket sector, I think that’s cheap. And when I look at the predicted 2021-22 dividend yield of 5%, I reckon it’s even cheaper. So why the lack of investor enthusiasm?
We can’t ignore the longer-term decline in Tesco’s market share. The most recent Kantar figures put Tesco’s share of the UK’s grocery market at 27%. That’s significantly ahead of second-placed Sainsbury’s on 15.7%. But Tesco used to command more than 30% of the market, and relative newcomers are slowly chipping away. Every chip puts extra pressure on the Tesco share price.
Aldi’s market share has already reached 7.7%, and it’s closing in on Morrisons‘ 10.3%. I wouldn’t be surprised to see those two positions reversed before too much longer, putting Aldi fourth (behind Asda). Lidl is also climbing the rankings, now with 6.2% of the market.
Still, despite the growing encroachment from these newcomers, I reckon Tesco has one key advantage. And it’s a big one. I’m talking about its home deliveries service, which has come to the fore in 2020. Despite their reasonable performance, I don’t think Tesco shares have caught up with the potential.
Shopping paradigm shift
Online groceries shopping boomed in 2020, due to the pandemic. But I really don’t see it as a one-off switch in the UK’s shopping habits. Many have been forced to overcome the inertia and get online to do their shopping this year. And you know what I’ve been hearing from people I’ve spoken to? Things like “Oh, that was quite easy really,” and “I’ll do that again” and I think we’re in the midst of a permanent shift.
Tesco was the big early mover in the online groceries business. And though Ocado might be capturing the imagination, that relative newcomer only accounts for 1.7% of the market. Tesco has it all in place, and enjoys the cumulative expertise built from its experience. I reckon that gives Tesco a significant competitive advantage over the competition, and I envisage a growing share of the online groceries market.
The share price puts Tesco on my 2021 buy list.
Alan Oscroft 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.