The Motley Fool

Is the Tesco share price too cheap at current levels?

Image source: Tesco

Taking a quick look at Tesco‘s (LSE: TSCO) share price lately, it looks pretty cheap to me. Its stock performance took a nosedive in mid-February. Now, it is trading at 226p, down 25% from 299p a year ago. 

As a value investor, this performance has attracted my attention. I’m always looking for cheap shares that can diversify my portfolio, and it seems as if Tesco might qualify.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

However, Tesco’s stock price doesn’t tell me much about its underlying performance. Just because it is trading lower today than 12 months ago, doesn’t mean the stock is worth buying. So I need to dig deeper.

Looking at Tesco’s financials

The first step I take in understanding if Tesco is undervalued is checking its financials.

Tesco recently released its preliminary results for 2020. Headline sales excluding fuel were up 7.1% to £53.4bn, driven by an 8.8% rise in its core UK and Ireland stores. However, Tesco Bank revenue fell by £400m, or 31.2%, during the pandemic. Adjusted operating profit also dropped to £1.8bn from £2.5bn in 2019-20, down 28.1%. This was largely due to £900m of extra costs relating to Covid-19. 

However, it was not all doom and gloom. Covid-19 has been dreadfully difficult for almost every industry, grocery included. Tesco has implemented massive infrastructural and behavioural changes to combat the pandemic. But the supermarket reckons only a quarter of these extra costs should continue into 2021-22. If this is the case, then Tesco has predicted that its bottom line could see a boost of £675m from lower expenses.

To me, 2020 was a Covid-induced blip.

Tesco’s share price potential

Despite the rise of discount competition, Tesco is still dominant in the UK grocery market with 27% market share. Although it operates in a mature market, meaning that growth will be slower, I’m not worried. Its market dominance and 9.15p per share dividend payment make it an optimal retirement stock for me.

And it does still have growth opportunities. Tesco is focusing on growth by opening new Express format stores. These are smaller shops that typically have less choice than their larger counterparts. I think this enables Tesco to boost its brand and distribution network at lower cost. As well, Tesco has entered the growing plant-based meat industry, a sector that analysts expect to be worth $17bn globally by 2024.

Continued innovation and market opportunities such as this will only help to see Tesco’s share price grow. 

Risks to Tesco’s share price

As a British grocery chain at the top, it can be very easy to fall. Stiff competition from the likes of Sainsbury’s and Morrisons pose a significant threat. The German players are also making strides in the British market, with Lidl and Aldi both gaining market share in 2020. 

And Covid-19 is still a problem. Tesco’s profits could suffer if more infectious variants of Covid-19 emerge, as we’ve seen in Brazil, and postpone the global reopening. Conversely, Tesco’s sales may take a short-term hit if pubs, bars, and restaurants boom after reopening.

So, is it too cheap?

I believe that Tesco represents a great discount buying opportunity right now. This is a dividend-paying market leader that has managed a global pandemic pretty well from my perspective. Any dip in its price is short-term in my opinion, so I’d be happy to buy it at these prices.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Jamie Adams has no position in Tesco. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.