Before the global financial crisis (GFC) of 2007-09, I was a great admirer of Tesco (LSE: TSCO). Former boss Sir Terry Leahy turned the UK’s biggest supermarket into a powerhouse making billions of pounds a year. But under subsequent leadership, Tesco’s reputation for competence and delivery evaporated. As a result, the Tesco share price took a pounding and never returned to previous heights. But I think the group is in a great position to benefit from UK economic recovery.
Tesco shares slump
In November 2007, before the worst of the GFC, the Tesco share price peaked above 625p. However, over the next eight years, the stock suffered a series of setbacks. In December 2015, it had collapsed to below 180p, losing 71.2% of its value. Yikes. Over the past five years, the stock has oscillated between 190p and 340p, but with little upward momentum.
As I write (before Wednesday’s market close), the Tesco share price stands at 268.5p. It’s up 15.5p (+6.1%) today, a decent performance considering the FTSE 100 index is down over 1%. This followed the release of a solid set of results from the UK’s largest grocer (with a 27.3% market share). Half-year sales rose by 2.6% versus the same period in 2020 to a whopping £27.3bn. As a result, adjusted operating profit soared by over two-fifths (+40.6%) to £1.46bn, while pre-tax profit more than doubled to £1.14bn. The group also reduced its net debt to £10.2bn from £12.5bn. The grocer now expects to make £2.6bn in the full year to 27 February 2022.
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TSCO jumps more than 20%
On 14 April, with the Tesco share price standing at 227.35p, I said, “I see the Tesco share price as a winner in 2021/22.” With the stock now trading at 268.5p, it’s since gained over 41p. That’s a healthy return of 18.1% in under six months. What’s more, the stock has shown recent strength, avoiding the FTSE 100’s summer slump. On 18 June, TSCO closed at 221.75p, leaping by 21.1% in less than four months. Over the same timescale, the FTSE 100 index has lost 0.3%, making TSCO a summer superstar.
Is it too late to buy TSCO?
I don’t own Tesco shares at the moment. After a 20%+ rise in four months, is it too late to buy TSCO at a reasonable price? I think not.
As an old-school value investor, when I view Tesco today, I see a lot to like. Its market leadership is holding up, despite German discounters Aldi and Lidl trying to undercut Tesco’s prices. Also, its market value of £20.7bn makes it one of the Footsie’s bigger hitters. Its shares currently trade on a price-to-earnings ratio of around 13 and an earnings yield of 7.7%. They also offer a dividend yield of 3.8% a year, bang in line with the FTSE 100’s forecast yield of 3.8% for 2021.
Hence, I would happily buy this stock today for its growth prospects and defensive qualities. Then again, history tells me that investing in this particular share can be a rough ride. Worries about rising Covid-19 infections, supply-chain issues, and driver shortages could all drag down TSCO. And a bad Christmas might hit all supermarket stocks. Even so, I’d hang onto TSCO for the long term!
