The performance of Tesco (LSE: TSCO) this year has been highly encouraging. The company’s recovery potential is being delivered, rising by 11% versus a fall of 3% for the FTSE 100.
Looking ahead, the supermarket’s turnaround plans could still mean that it is able to generate further capital growth. Although it is operating in a competitive industry, its strategy seems to be working well after a tough period for the business.
Clearly, it’s not the only potential turnaround stock which could be worth buying. Reporting on Tuesday was a relatively risky smaller company which could have high reward potential in the long run.
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Significant change
The company in question is delivery solutions specialist DX Group (LSE: DX). It released results for the year to 30 June 2018 on Tuesday which highlighted the significant change which has occurred during the period. It has put in place a new management team which has restricted the business into two divisions: DX Freight and DX Express. The ‘OneDX’ strategy being employed is focused on reducing losses in the Freight division, with it making progress in this regard according to today’s update.
Looking ahead, the company could benefit from a three-year investment programme in core IT and management systems. It has also strengthened its sales teams, with a devolution of accountability to general and regional managers. They now have greater authority over their operations, with the company’s aim being improved customer service levels.
With the loss after tax narrowing to £19.5m from £81.1m in the previous year, a turnaround appears to be possible. While DX Group is a high-risk stock due to its financial performance, it could post improved capital gains in future.
Improving outlook
Tesco’s turnaround may still have some way to go. The company has been able to refocus the business on its core operations in recent years, with it now being a UK food retail business. This is helping to improve its efficiency at a time when competition within the supermarket sector is increasing. As such, it may be able to deliver impressive profit growth – especially with the growth potential which recently-acquired Booker offers.
The decision to open a no-frills operation called Jack’s could provide Tesco with a further growth catalyst over the long run. It may allow it to benefit from customers trading down to discount retailers, while at the same time maintaining its strong position as a mid-market operator. Clearly, Jack’s is a relatively small operation. But if it is successful then its parent company has the financial firepower to quickly grow it over the medium term.
With Tesco trading on a price-to-earnings growth (PEG) ratio of 0.8 even after its recent share price rise, it appears to offer good value for money. As such, it could be worth buying for the long term, with its recovery not yet complete.
