FTSE 100

Where next for the Tesco share price?

Does Tesco’s stock price offer further upside potential?

Tesco’s (LON: TSCO) share price has generated strong returns over recent months. The FTSE 100 (INDEXFTSE: UKX) retailer’s shares are up 22% in the past six months, versus 5% for the index, as investor sentiment has been buoyed by better-than-expected results.

Indeed, the firm’s revenue and profit growth were both ahead of expectations in the first half of the year. This led to a slight increase in profit guidance for the full year.

Tesco is now expected to deliver earnings per share of 19p in the current year, followed by 21p the year after. This translates to a forward price-earnings ratio of 14 using current year expectations, which falls to 12.5 using next year’s forecasts. This suggests the company’s shares could still offer good value for money relative to the wider FTSE 100 index.

The firm’s long-term growth prospects could make its shares more attractive. Its first-half results showed that it has maintained a market share of around a third of online grocery sales. It is also trialling expedited delivery services across 50 of its convenience stores, which could make it increasingly competitive versus online rivals.

Furthermore, over 20m UK households now have a Clubcard. This provides Tesco with greater insight into its customer habits and could act as a means of improving loyalty within what remains a hugely competitive grocery sector. Customer satisfaction levels also improved in the first half of the year, while the firm’s Booker catering subsidiary experienced a recovery in sales as lockdown measures abated.

Clearly, challenges remain in the UK retail sector that could hold back the Tesco share price prospects. For instance, rising inflation may prompt a squeeze on consumer disposable incomes that makes customers increasingly price-conscious. Meanwhile, greater investment from retail peers could threaten the company’s dominant online position.

However, with Tesco’s Aldi ‘price match’ and focus on offering competitive prices, it may be less affected by declining disposable incomes in real terms than mid-tier operators such as Sainsbury’s and Waitrose. Furthermore, its current valuation suggests there is a margin of safety on offer that may factor in potential threats facing the wider industry.

As such, Tesco’s shares appear to offer long-term growth potential even after their recent outperformance of the FTSE 100 index. Although an uncertain economic outlook could weigh on the wider retail sector in the short run, the company’s online market position, relatively high degree of customer loyalty and valuation suggests there is scope for further share price appreciation in the coming years.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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