While the excitement surrounding the plan for turning Tesco (LSE: TSCO) around may have boosted its share price in recent months, there is a long way to go before it becomes a business that is back to full health. So, although its shares have risen by 15% in the last six months as investors have felt much more upbeat regarding CEO, Dave Lewis’, new strategy, it would be of little surprise if, in the short run at least, shares in Tesco fail to replicate their recent past performance.
However, for long term investors it remains a superb buying opportunity that is more appealing that two stocks which also have excellent future prospects: SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US) and Sports Direct (LSE: SPD). Here’s why.
Emerging Problems
While SABMiller’s exposure to the emerging world is a major advantage to the business in terms of offering long term growth potential, weak sales in Asia in particular are causing the company’s earnings forecasts to be rather low. For example, over the next two years SABMiller is expected to post growth of just 4% and 8% respectively in its bottom line. Neither of these figures are particularly impressive when you consider that the FTSE 100 is expected to deliver growth in the mid to high single-digits in the same time period.
The problem for SABMiller, though, is that its shares trade at a substantial premium to the FTSE 100, despite having growth prospects that are worse than those of the index. For example, while the FTSE 100 has a price to earnings (P/E) ratio of around 16, SABMiller’s P/E ratio is 21.7. As such, its share price could come under pressure unless it is able to start delivering improved bottom line growth numbers.
Transitionary Period
Meanwhile, Sports Direct is set to increase its bottom line by 16% in the current year, followed by 11% next year. Although impressive, Sports Direct may prove to be a less appealing investment over the medium to long term due to a shift in the spending habits of UK shoppers. That’s because, while Sports Direct has benefitted from consumers who were increasingly price-conscious while wage growth was outstripped by inflation, in future this situation looks set to be reversed. In fact, shoppers seem likely to want to treat themselves to higher price point items, which could put pressure on Sports Direct’s ‘pile it high and sell it cheap’ business model.
Looking Ahead
So, while SABMiller and Sports Direct remain good stocks to hold for the long run, their valuation and medium term outlooks, respectively, mean that their share prices could come under pressure. For Tesco, though, it appears to be set to benefit from a reversal in the trend for people to shop at no-frills supermarkets such as Aldi and Lidl. In fact, with Tesco investing in more staff, better store environments and improved customer service, it could see sales improve as customers become less obsessed with saving money in favour of a more pleasant shopping experience.
In addition, Tesco offers strong growth prospects, with its bottom line forecast to rise by 31% next year and, with it trading on a price to earnings growth (PEG) ratio of just 0.6, it appears to offer excellent value for money at the present time, too.
