Markets are volatile and the economic outlook is uncertain. However, I reckon supermarket giant Tesco (LSE: TSCO) is a business that can thrive in the current environment and beyond. Indeed, if I had £1,000 to invest in July, I’d happily buy Tesco shares.
Here, I’ll explain what I like about the business. And why I believe the stock offers great value at its current level.
Revival
Tesco has enjoyed a strong revival under chief executive Dave Lewis. Revenue has grown from £53.9bn to £64.8bn over the last five years. Underlying operating profit has increased from £1bn to £3bn, with the profit margin expanding from 1.8% to 4.6%.
Lewis has achieved this with a back-to-basics strategy of “focusing completely on customers, re-engaging our colleagues and fundamentally rethinking our relationship with suppliers.” Retail isn’t difficult if you do it right. And with Tesco’s economies of scale, Lewis has positioned the group to profitably co-exist — and indeed compete — with hard discounters, such as Aldi and Lidl.
Tesco shares deeper insight
In my experience, and anecdotally from family and friends, Tesco has been the best supermarket under lockdown. It appears to be a view widely shared by the UK public. Alongside its recent first-quarter trading statement, the company published an additional information pack.
Among other things, this one-off deeper insight into Tesco’s trading performance during the pandemic detailed a strong improvement in its core brand health. Furthermore, on Covid-19-specific brand metrics it was ranked the top supermarket for ‘doing the right thing’. There was also a sharp increase in customers switching to Tesco from Aldi during the period (for the first time in over a decade).
Tesco launched an ‘Aldi Price Match’ proposition in March. In the Q1 trading update, it said: “We are extending ‘Aldi Price Match’ to nearly 500 Tesco and branded products and will continue to seek further opportunities to bring even greater everyday value to customers at this challenging time.“
Tesco is using its might to keep its customers happy and to win new fans. This bodes well, not only for the near-term period of economic contraction and high unemployment, but also for the longer term. I expect the company’s impressive performance during the pandemic to engender some degree of lasting loyalty among customers.
Like the Lone Ranger of old, with his “my work here is done,” Lewis has restored the world of Tesco to order, and is set to exit, stage left. His successor, Ken Murphy, chief commercial officer and president of global brands at Walgreens Boots Alliance, looks a good appointment to me.
Valuation of Tesco shares
Having explained what I like about the business, let me tell you why I believe Tesco shares offer great value. They’re trading around 225p, as I’m writing, which is 12.5 times last year’s earnings. I feel this is cheap for a dominant business in a defensive sector. Last year’s dividend was securely covered twice by earnings, and the yield of just over 4% is an added attraction.
All in all, I reckon this is a great opportunity to buy Tesco shares for the long term.
