The Tesco (LSE: TSCO) share price has had quite the past year. The company’s share price ran up through the year, even reaching multi-year highs, after adjusting for the sharp fall in share price early in the year that happened for technical reasons. By comparison, 2022 so far has not been particularly good for the stock. Its share price is actually below where it started the year as I write.
Inflation’s impact
To be fair, the year has only seen a few trading sessions so far, so it is too early to start mapping out trends. At the same time, I cannot help but think that it might be an early sign. One big risk that has been on my mind the past few days is inflation. The latest numbers are pretty high. And for the past two months now, the UK’s headline inflation has stayed above 5%. As per forecasts, it is unlikely to subside anytime soon.
In light of this, I think Tesco could be one of the FTSE 100 stocks more vulnerable to the trend. While the grocer is a go-to stop for basic daily requirements for households across the UK, it also meets non-discretionary requirements that could be cut down on if prices rise too much and spending power declines. Just to keep the bills in check, there could be small cuts that might not really make a big difference to the overall standard of living. If this happens for all households across the economy, chances are that it could impact the company’s financials.
So, to answer the question asked in the title, I do believe that inflation could create uncertainty for the Tesco stock price. And not just because of rising prices, but also because of cost pressures that it has itself acknowledged in its recent update. Despite this, the company is quite optimistic, however, about its prospects.
What could go right for the Tesco share price
Certainly, a lot of things are going right for it. It has performed well this year and has even upgraded its profit expectations. That in itself is a potential case for a share price rise. Higher profits would bring its market valuations, measured by its price-to-earnings (P/E) ratio, lower if it were to remain at the same price as now. In any case, its P/E is only around 19 times right now, which is just a bit higher than the 18 times ratio for the FTSE 100 as a whole. Now, if it were to fall below the average, it would look cheaper than the average stock to me.
What I’d do
But that is only if I also see it only as risky as the average stock. If, because of inflation, I believe that it is higher risk, perhaps I would still not buy it. On balance though, I still do believe that the Tesco share price has more upside than not. Interest rates are rising and fiscal stimulus is being withdrawn, which could cool down inflation in some months. I maintain that I’d buy it now.
Manika Premsingh 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.
