The Tesco (LSE: TSCO) share price has been on a roll over the past six months. Shares in the retailer have added 25% over the period, excluding dividends paid to investors.
Over the past 12 months, the stock has produced a total return (including dividends) of 12.9%. Over the same period, the FTSE All-Share Index has returned 14.5%.
It has not outperformed the index over the past year, but it has over the past three years and five years respectively. Over those extended periods, the Tesco share price has outperformed the FTSE All-Share Index by around 2.6% per annum.
Of course, past performance should never be used to guide future potential. However, I believe the competitive advantages that have helped the company outperform over the past five years will continue to work in its favour.
Competitive advantages
I believe the company has outperformed the competition over the past half-decade for a couple of reasons.
First of all, economies of scale have helped the group keep costs low and reduce prices for consumers. This has, in turn, enabled the business to gain market share and outperform the rest of the UK grocery market.
The second reason I believe the company has been able to outperform the market is its diversification. With its broad array of products, including mobile phones and financial services, Tesco can afford to cut prices to consumers (and take the profit margin hit) in one section of the business, knowing profits in another department will cover some of the giveaways.
Most of the company’s peers do not have the size and scale to compete with the business regarding product pricing and efficiency. That is why I think this is by far the best operator in the sector.
What’s more, these advantages should come into their own this year.
Tesco share price outlook
With inflationary pressures driving the cost of food and wages higher across the country, retailers are facing enormous challenges. Do they pass these costs onto consumers and risk losing business? Or do they absorb the higher costs?
Discounter Aldi has already said it will be striving to keep costs as low as possible for customers. That puts Tesco and its peers in a bind. To maintain market share, these companies will have to follow suit.
With its vast distribution network, economies of scale and diversification, Tesco can afford to follow Aldi. This could hurt profits, and the business is far from immune from the inflationary pressures, but it does have the qualities required to navigate the uncertainty.
And that is why I believe the Tesco share price can continue to push higher in 2022. Its competitive advantages could enable the business to outperform the market, translating into higher sales and potential profits.
Historically, the stock has traded at a forward price-to-earnings (P/E) ratio of around 15. If the stock returns to this level, based on City analysts’ growth estimates, the shares could hit 330p.
Although these returns are far from guaranteed, that would be a three-year high for the stock. Further economic disruption could hit growth, and the market may punish the business as a result.
Still, considering this potential, I would buy the stock for my portfolio.
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Rupert Hargreaves 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.
