Tesco’s share price has fallen. Is now the time to buy?

After a strong start to the year, Tesco plc (LON: TSCO) shares have drifted lower in recent months and now trade at an attractive valuation. Is this a buying opportunity?

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After a strong performance early in 2019, Tesco‘s (LSE: TSCO) share price has drifted lower in recent months. Trading above 250p in April, the shares currently change hands for 216p.

At that price, Tesco trades on a forward-looking P/E ratio of just 12.7, below the FTSE 100’s median forward-looking P/E of 13.5. Does that mean the stock now offers value? Here’s my take.

Low industry growth 

While a P/E ratio of 12.7 is not overly expensive, there’s not a lot to get excited about with Tesco shares, in my view.

For a start, the supermarket industry is a low-growth industry. Indeed, the latest grocery sales figures from market research firm Kantar show that year-on-year supermarket sales actually fell by 0.5% in the 12 weeks to 14 July. Now, a comparison with last year was always going to be tough due to the heatwave the UK experienced last summer and the World Cup. However looking ahead, I expect industry sales growth to remain underwhelming. 

Losing market share

Additionally, Tesco continues to lose market share to the German discount supermarkets Aldi and Lidl. Over the 12-week period to 14 July, Tesco’s market share fell 0.4% from 27.6% to 27.2% according to Kantar. Meanwhile, Aldi’s market share surged from 7.5% to 8.1% and Lidl’s climbed from 5.4% to 5.8%.

Going forward, I expect this trend to continue. One reason for this is that prices are generally far cheaper at Lidl and Aldi and this is likely to attract a lot of shoppers in the current financial environment. The fact that Tesco hiked its prices on 1,000 products in July won’t have helped its cause.

Moreover, the German supermarkets are really lifting their game at the moment. For example, many of these supermarkets now have self-service checkouts, which they didn’t have a few years ago. Lidl also has wraparound bar codes on many of its products which makes them far easier to scan. Meanwhile, Aldi is opening more ‘local’ stores in London after positive feedback from its first store in Balham.

Of course, Tesco is battling hard to compete with the German supermarkets. For example, just this week it announced that it will cut 4,500 jobs across its Metro stores in an effort to streamline its business. And Tesco Chief Executive Dave Lewis stated in June that the group’s customer offer is “more competitive than ever.” However, I still think the company is going to struggle as the discounters aggressively target market share. 

Low dividend

Finally, Tesco shares don’t offer a lot of dividend appeal relative to other FTSE 100 stocks right now. Last year, the group declared a dividend of 5.77p, which equates to a yield of just 2.7% right now. Granted, analysts do expect Tesco to lift its payout substantially this year, to 8.23p. However, given that the group does not have a long-term dividend growth track record after slashing its payout a few years ago, I would take this forecast with a grain of salt. The dividend payout could end up being lower.

Overall, Tesco shares continue to have minimal investment appeal, to my mind. I think there are better stocks to buy right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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