Key points
- Tesco has an excellent growth record
- The company recently increased its profit guidance
- A crowded retail sector might impact the share price
Mainly known as a food retailer, Tesco (LSE: TSCO) is among the most recognisable brands in the UK. Its segments span food and fuel retail to banking, and it operates in the UK, Ireland, and much of Central Europe. The company has performed particularly well during the Covid-19 pandemic and the Tesco share price is up 30% since March 2020. So should I be adding this stock to my portfolio? Let’s take a closer look.
Appealing fundamentals
A fundamental analysis of Tesco reveals a very strong track record. This is demonstrated in terms of earnings per share (EPS), revenue, and profit before tax. The company has particularly strong earnings data. Over the past five years ended 27 February, I have calculated that the Tesco EPS shows an average annual growth rate of 12.3%. As a potential shareholder, this is extremely attractive.
This earnings record contrasts with competitors, like J Sainsbury. While Tesco has seen its earnings grow, J Sainsbury’s have been consistently declining. For me, this is simply another reason to view the Tesco share price as an attractive current prospect within its market sector.
With a price-to-earnings ratio (P/E) of 19.9, this is slightly above the industry average of 19. While this does not imply that Tesco is wildly undervalued, it is also not terribly expensive.
What’s more, the company is profitable. In the last fiscal year, Tesco posted profits before tax of £825m. This is up from £145m five years ago. It is heartening to see that this stock has continued to post profits during the turmoil of the pandemic. This is another reason I’m thinking of buying Tesco.
Recent factors impacting the Tesco share price
Good news continued in a recent trading update for the 19 weeks to 8 January 2022. In another display of solid growth, group retail sales increased 2.6% on a year-on-year basis. Furthermore, in advance of its annual results, Tesco raised profit guidance in the retail segment to £2.6bn and in banking to £160m-£200m. I will be looking very closely when the annual results are published in the near future.
The news is not universally positive, however. The retail sector is becoming increasingly crowded and competitive. Only in October 2021, Morrisons was bought by a US private equity firm for £7bn. Furthermore, there is an ongoing price battle with more affordable stores, like Aldi. This competition could ultimately have a negative impact on the Tesco share price.
On the flipside, the company appears to have navigated the pandemic-induced supply chain issues rather well. The research group Kantar recently stated, “Shoppers clearly trusted that supermarket shelves would remain well stocked”. This is testament to Tesco’s smooth operations, unlike other supermarkets like Lidl.
With solid fundamentals and positive forward-looking guidance, I’m excited by this stock. Although there is increased competition, I think the company can embrace it and this will hopefully have a positive influence on the Tesco share price. I will be purchasing shares without delay.
Andrew Woods 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.
