At first glance it might look as if the Tesco (LSE: TSCO) share price has been a nightmare over the past year. The FTSE 100 supermarket is down more than 20% since this point in 2020 due to last month’s share price collapse. The absence of significant dip-buying in the aftermath might suggest that there are big problems at Britain’s biggest retailer, too.
The Tesco share price hasn’t fallen due to some fundamental worsening of its business or some other seismic event though. You could in fact say that the drop reflects the mechanics of the market. Put simply, Tesco raised £5bn by selling its struggling operations in Asia. It then distributed the proceeds to its shareholders in March by way of special dividends. Finally it reduced the number of shares in circulation (known as a share consolidation) to offset the impact of these one-off dividends. That caused the fall.
The Tesco share price looks cheap!
The important question facing investors today is whether the Tesco share price provides good value right now, and whether or not it can rise over the long term.
On the first point the FTSE 100 firm certainly looks like a great value stock to buy, at least in my opinion. City analysts think Tesco’s share price will rise almost 60% in the current fiscal year (to February 2022). This results in a forward price-to-earnings growth (PEG) ratio of 0.2.
Investing theory suggests that any reading below 1 might mean that a share is undervalued by the market. Don’t think that this is the only reason why the Tesco share price provides top value right now, however. The supermarket’s dividend yield sits at 4.2% for this financial year. Compare this with the 3.5% forward average that UK shares currently offer.
A sting in the tail
I do love bargain hunting when I’m looking for UK shares to add to my Stocks and Shares ISA. But Tesco isn’t a share I’m considering buying, not even for a second. The main reason for this is because of intense competition in the British grocery sector which is hammering margins and decimating the customer bases of the country’s established firms like Tesco.
It’s no coincidence that Tesco’s share price has slumped 54% over the past 10 years, a period in which Aldi and Lidl’s have expanded rapidly in the UK. Over the past decade premium supermarkets like Waitrose have also grown their market share, whilst the likes of online-only operator Ocado have also emerged to pull shoppers away from Tesco. The pressure looks set to intensify too, with the likes of Aldi now operating online and Amazon launching bricks-and-mortar operations in recent months.
On the plus side, Tesco has one of the best online operations in the business. This should stand in its favour as e-commerce activity balloons. Additionally, Tesco has the sort of scale which none of its competitors (bar Amazon) can match, which could help it bounce back strongly this decade. But I don’t think that these points outweigh the risk of growing competition. So I’d rather buy other UK shares today.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Ocado Group and Tesco and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.