Improving UK Economy
For the first time since the start of the financial crisis, UK consumers should see their wages rise faster than the rate of inflation in 2015. This could have a significant impact upon not only the volume they spend, but also upon their spending habits, too.
While price has been the most important factor in the last few years, supermarket shoppers may now swing back to viewing price, service and quality as of equal importance. For operators such as Tesco (LSE: TSCO), which apparently offer better customer service and more variety than no-frills retailers, this could provide a boost to sales in the short to medium term.
Turnaround Plan
New CEO Dave Lewis has launched a turnaround plan that seems to be very sound. Tesco will close 43 unprofitable stores, cut back significantly on new store openings and also seek to rationalise the business. This is a logical approach to take, since Tesco has become bloated and, it could be argued, overly diversified in recent years as it has sought to expand its operations outside of food retail.
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By getting back to what Tesco does best: selling a wide range of items at low prices, the company could rekindle the kind of performance that investors became used to under previous CEO, Sir Terry Leahy. Certainly, it will be a long road ahead, but the new strategy appears to be the right one.
Growth Potential
Although the current year is expected to be a major disappointment, with the company’s bottom line forecast to fall by 65%, the next two years are due to be much better. For example, Tesco is all set to report a rise in profit next year of 2%, followed by an increase of 23% in the following financial year. If met, this would be a superb rate of growth and could reset the market’s view of the company and lead to a much higher share price over the medium term.
Great Value
Using those earnings forecasts, Tesco seems to offer good value for money. For example, it has a price to earnings growth (PEG) ratio of just 0.7, which indicates that its shares offer growth at a very reasonable price. As such, it could be all set for share price rises moving forward – especially since the FTSE 100 has a PEG ratio of over 2 at the present time, thereby highlighting the excellent vale that Tesco offers on a relative, as well as absolute, basis.
Improving Sentiment
With investor sentiment in Tesco improving significantly in recent weeks, now could be a good time to buy a slice of the company. For example, Tesco has seen its share price rise by an incredible 30% in the last three months alone and this shows that the market’s view of the company has changed in recent weeks. And, looking ahead, this momentum could continue and send Tesco’s share price to even higher highs.
