Over the past 12 months, the Tesco (LSE: TSCO) share price has returned a healthy 26% for investors. By comparison, the FTSE All-Share Index has risen 9% in the same period.
However, 2022 has seen Tesco shares struggle. And the stock is currently down 5% year to date. Despite this, I think at the current price, Tesco shares could be a great addition to my portfolio. Let’s see why.
Appealing fundamentals
One of the most appealing factors for me is the firm’s strong fundamentals.
In its Q3 and Christmas trading statement released earlier this year, Tesco said overall sales grew 2.6% year on year. And this was 8.2% on a two-year comparison. This growth was in part fuelled by Tesco’s ability to double its online delivery capacity during the pandemic. And as a result, the business said it had the highest total market share in four years. As a potential investor, these are pleasing results to see.
I also think Tesco is considerably undervalued, especially when compared to its competitors. It currently trades at a price-to-earnings (P/E) ratio of a mere 3.3. For context, one of its main rivals, Sainsbury’s, trades at a P/E of 20.6. This is an attractive factor for me.
What I also like about Tesco is the stability it can provide during volatile periods. The business is not immune to the side effects of issues such as inflation. However, as my fellow Fool Rupert Hargreaves stated, as long as there is a human need to drink and eat, Tesco’s services will be in demand. This places the firm in a strong position.
Additionally, it has market power to negotiate prices with suppliers, meaning it can keep prices low — in turn drawing in more customers. And when these ideas are added together, it shows just how tempting a proposition Tesco shares are. In fact, supermarkets in general are much in demand at present and last year, rival Morrisons was taken over by a US private equity firm for £7bn.
Tesco shares concerns
Yet I do have a few concerns as this is a competitive sector. And cheaper, more affordable stores such as Aldi have been on the rise lately. There is always the threat these businesses steal market share from Tesco. IGD expects the discount grocery market to be worth £34.4bn by 2026. And this growth will be fuelled by the increasing cost of living.
A shortage of workers has also forced Tesco to raise its wages, in turn increasing its labour costs. This will squeeze its margins.
Why I’m buying
Regardless of these potential issues, I am still bullish on Tesco. Its strong results even during the pandemic show the retailer’s resilience. With its low P/E ratio, I also think the stock presents real value. Couple that with the potential stability it can provide during turbulent times and I think Tesco shares would be a great addition to my portfolio. As such, I would buy today.
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Charlie Keough 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.
