Tesco’s (LSE: TSCO) share price has been on a wild ride in recent weeks.
The robustness of the British grocery sector in 2020 allowed the FTSE 100 firm to avoid some of the stock price washouts that countless other UK shares endured. It basically finished the year at the same level as it began it. But Tesco’s share price has fallen sharply after deciding to pay a special dividend and embark on a share consolidation last month.
Tesco’s now trading at its cheapest since June 2017, around 220p per share. Is now the time to buy?
Bright spots
There are a number of reasons why I think Tesco’s share price could rocket higher. These include:
#1: The growth of online shopping. Covid-19 lockdowns over the past 12 months have seen a legion of new customers do their grocery shopping on the internet. And as a consequence, predicted online growth rates for food retail have been given a boost. This bodes particularly well for Tesco, which is the leading operator for online delivery with a market share of around 35%. The FTSE 100 firm has ramped up capacity to make the most of this opportunity too.
#2: Doubling down on Britain. Tesco’s crown at the top of British retail first began to slip when it embarked on hasty foreign expansion at the start of the millennium. Doomed forays into territories like the US and Japan were costly in their own right and sucked up a lot of time and money that could have been best dedicated to the company’s core UK market. The retailer seems to have learned its lessons though, and the sale of its remaining Asian assets in December means that Tesco has moved even further in the right direction.
Threats to Tesco’s share price
Despite these bright spots, however, there are reasons why the FTSE 100 company might struggle to rise again.
Rampant competition is one. My main concern is that the British grocery sector is becoming more and more competitive. The aggressive expansion of Aldi and Lidl has pulled shoppers out of Tesco’s clutches in huge numbers over the past decade. The threat is intensifying online too, with the German discounters taking tentative steps in the realm of internet shopping. US e-tail giant Amazon is gradually ramping up the attack as well.
Huge Covid-19 costs are another issue. Tesco also faces the prospect of more heavy charges related to Covid. The firm announced in January that it was hiking its full-year cost estimates to £810m, up a whopping £85m from its previous estimates. A prolonged battle to curb the coronavirus could see the FTSE 100 firm continuing to rack up eye-popping costs.
The verdict
It could be argued that Tesco’s cheap share price reflects these problems. The retailer currently trades on a sub-1 forward price-to-earnings growth (PEG) ratio of 0.3 times, suggesting it’s undervalued. But I won’t be buying the grocery giant as those rising competitive pressures create too much risk for me. I’d rather buy other UK shares today.
