Should I buy Tesco shares at 250p?

Dylan Hood — Wed, 22 Jun 2022 07:25:00 +0000

Tesco (LSE: TSCO) shares have been struggling to ride the storm of recent market volatility, falling 15% so far in 2022. That being said, the shares have returned over 10% in the last 12 months, highlighting a strong recovery from the pandemic.

With the stock currently sitting at 250p, is now the time to buy? Let’s take a closer look.

Strong results

Tesco released its Q1 2023 trading statement last week, which contained some solid results. Like-for-like UK and ROI sales rose by 1.5% year on year, and 9.7% over a three-year period. The £12.5bn sales figure surpassed pre-pandemic results, highlighting the impressive recovery of the firm. In Central Europe, sales grew over 9% in the past year, demonstrating the growing international presence of the firm. In addition to this, the firm announced it had raised its market share by 37 basis points, which outperformed expectations in both value and volume.

Tesco has also been taking steps to build out its online delivery presence. In January, it announced plans to open 25 new urban fulfilment centres across the UK to capitalise on the growing online demand. Analyst predictions suggest the online grocery market could be worth over £22bn by 2025. Tesco looks well-positioned to take full advantage of this growth should its fulfilment plans materialise.

In addition to this, it has been taking encouraging steps towards competing with cheaper supermarket chains. Its Aldi Price Match scheme has grown to take in 19% more products this year than last. Its Low Everyday Prices products have risen by the same percentage.

Finally, Tesco shares currently yield a dividend of 4.36%. This could help me combat rising inflation and add some passive income to my portfolio.

Expensive shares

Tesco stock currently trades on a price-to-earnings (P/E) ratio of 12.7. On the surface, this doesn’t seem too expensive and isn’t far from the value P/E barometer of 10. However, looking at J Sainsbury and Marks and Spencer, which trade on P/E ratios of 7 and 9, respectively, the share price does look a little steep for my liking.

Although Tesco has been taking action to stop the drift towards low-cost rivals like Aldi and Lidl, rising inflation could hinder this progress. As prices are being pushed up across the board, and the cost-of-living crisis worsens, more and more customers are likely to make the switch. Tesco operates with tiny margins so any losses in its consumer base could prove catastrophic.

A buy at 250p?

As I said, at 250p, Tesco shares look a little too expensive for me, especially compared to the wider market. Yes, sales have proved consistent, and growth prospects are encouraging. But I think rising prices could really hurt Tesco over the coming months. What’s more, the threat of a UK recession could slow the supermarket’s progress even more. For this reason, I won’t be buying the shares today.

The post Should I buy Tesco shares at 250p? appeared first on The Twelfth Magpie.

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Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) and 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.

Here’s why the Tesco share price is down 5% after earnings

John Choong — Wed, 13 Apr 2022 12:14:11 +0000

With over a 25% market share in the supermarket sector, Tesco (LSE: TSCO) is the UK’s biggest supermarket. Today, the grocery giant released its FY22 earnings results. Although the FTSE 100 company reported strong figures in every aspect, the Tesco share price has plunged 5% at the time of writing (Although it’s still up over 11% year on year). Here’s why.

A Lidl worried about Aldi’s prices

In its earnings statement, Tesco cited a cautious outlook as March’s CPI figure came in higher. With increasing food costs, many consumers have been flocking to budget competitors, Lidl and Aldi. This is evident in Kantar’s latest supermarket report as the two German retailers have seen an increase in their market shares. Nonetheless, Tesco reiterated its commitment to maintain its current prices. Unfortunately, this will also mean that its profit margins will most probably take a hit in the short-to-medium term. The firm also cited âsignificant uncertainties in the external environmentâ, giving a Â£2.5bn forecast for its operating profits in FY23. This is lower than the average Â£2.8bn analysts were expecting, and is the main reason why the Tesco share price is down 5% at the time of writing.

Squeezing every drop of juice

A consequence of inflation is that it sometimes leads to a wage-price spiral. This is when prices increase as a result of higher wages, and vice versa. As a result of this, Tesco decided to increase the wages of its workers by up to 6%. This could affect Tesco’s already narrow margins even further. This is worrying investors and several analysts who’ve dropped Tesco’s rating from buy to hold.

Nevertheless, CEO Ken Murphy mentioned on the company’s earnings call that Tesco will be using its new-found cash to invest in its supply chains. This should ease the margin pressure, and provides a silver lining in all the uncertainty as Tesco aims to work in close partnership with its suppliers to keep costs under control.

SUPERmarket

There were a couple of excellent points from Tesco’s FY22 results, however. For one, it reported stellar numbers across the board. There were healthy increases in revenue, earnings per share, free cash flow, operating profit, and a decrease in net debt. In addition to that, a Â£750m stock buyback was announced. This means that shareholders will be getting a bigger slice of ownership in the company, driving earnings per share higher. Normally, this would send the Tesco share price soaring. However, because the stock market often trades on speculation, Tesco’s amazing performance has been overshadowed by supply chain disruptions and inflation.

Yet I’m bullish about its long-term prospects and its ability to overcome the impending storm. I believe that Tesco’s quality and massive market share in the sector is a unique selling point. As such, it should be well positioned to maintain its position in the industry for the foreseeable future. The companyâs customer loyalty plan and scale still makes it by far the best supermarket stock to buy, in my opinion. Tesco’s plan to price-match Aldi on 650 items also shows its negotiating power with suppliers. As such, with a low price-to-earnings ratio and reasonable dividend, Tesco is a lucrative buy for me if I was looking to earn some passive income from a decent dividend-paying company.

The post Here’s why the Tesco share price is down 5% after earnings appeared first on The Twelfth Magpie.