It’s clear that since Sir Terry Leahy left Tesco (LSE: TSCO), things have gone very badly for the company and for its investors. Indeed, over the last year alone, Tesco’s share price has fallen by an incredible 39% and is now trading at an 11-year low. However, now could prove to be the perfect time to buy a slice of a company and, furthermore, its share price could double. Here’s why.
A New Strategy
Clearly, new CEO Dave Lewis is going to adopt a different strategy compared to his predecessor, Philip Clarke. Indeed, there are a number of different viewpoints as to what he should do. The most obvious changes that could improve the bottom line include making Tesco smaller through shutting less profitable stores, embarking on an international expansion that was championed by Sir Terry Leahy and scaled back under Philip Clarke, as well as splitting the Tesco brand between higher price-point and discount products, so as to become more of a niche player. All are sound ideas and could help to push the company’s bottom line upwards. In turn, this could have a positive impact on Tesco’s share price over the medium to long term.
Weak Sentiment
As well as a shift in strategy having the potential to increase Tesco’s share price (via increased earnings), now could be a good time to buy because investor sentiment is at a low ebb. The market appears to be expecting indefinite bad news from Tesco and anything remotely positive could be hugely welcomed (and rewarded) by the market in terms of a higher share price. For instance, if Tesco’s like-for-like sales figures show an improvement moving forward, or if its market share declines ease up, the market may begin to question whether the company’s low valuation is really warranted.
Weak Comparatives
Indeed, Tesco’s performance as a business has been weak in recent years. As a result, its year-on-year figures (such as like-for-like sales figures) have been very poor. This means that future numbers need only be mildly positive in order to beat the previous year’s figure. So, even if things don’t get a whole lot better for Tesco over the short term, as long as they don’t get much worse then it could be viewed as an improvement by investors. In turn, this could mean stronger sentiment and a higher share price.
Looking Ahead
Clearly, Tesco’s share price is low for good reason: the company has not performed well in recent years. However, a new management team and a new strategy has the potential to turn around the company’s performance. Indeed, with sentiment being so weak, even arresting the company’s decline could be handsomely rewarded via a higher share price and this could be a very realistic achievement since Tesco’s comparative numbers are poor.
Together, these factors could be enough to return Tesco’s share price to its 2010 level of 450p. Back then, Tesco delivered earnings per share (EPS) of 31.8p and traded on a price to earnings (P/E) ratio of 14.2. Today, its EPS is expected to be 24.2p and it trades on a P/E of just 9.3. A mixture of increasing profitability and improved sentiment could send it back there over the medium to long term.
