The Tesco (LSE: TSCO) share price rose by nearly 10% during in August. The supermarket giant’s stock has now risen by almost 20% over the last year.
Will this FTSE 100 stalwart continue climbing in September? Although I can see some things to worry about, I think Tesco’s market-leading position leaves the group in a strong position. In this piece I’ll explain what I expect in September — and why.
Are profits under pressure?
I can certainly see some reasons to be cautious about the outlook for Tesco.
Lockdown living caused Tesco’s sales to rise by 7% last year. This growth isn’t likely to be repeated in 2021, but so far Tesco seems to be keeping its head above water. The supermarket’s like-for-like sales rose by 1% during the three months to 29 May, compared to the same period last year.
Admittedly, these numbers were generated before Covid-19 restrictions were fully lifted in July. My experience over the summer suggests that the number of people eating out has risen sharply since May. Although a return to eating out should lift sales at Tesco’s Booker wholesale business, it could lead to a slight fall in supermarket shopping.
Another worry is the growing pressure on retailers due to the shortage of lorry drivers. I don’t know how this situation will be fixed. But I’d guess that any solution will involve higher costs for supermarkets.
Tesco may choose to absorb these costs rather than passing them onto customers, in order to protect its reputation for low prices. This could put pressure on profit margins.
Tesco share price: still good value?
I don’t want to sound too negative. I think Tesco’s position as the UK’s largest supermarket should help it manage these problems more efficiently than some rivals.
I also think that based on the information available today, Tesco shares probably still offer decent value.
While the share prices of J Sainsbury and Morrisons have surged on takeover hopes, Tesco’s share price gains have been limited. This tells me the market doesn’t expect a bid for this much larger business — a view I share.
The lack of takeover interest also means that Tesco looks a little cheaper than its rivals. Broker forecasts show that Tesco’s earnings are expected to return to pre-pandemic levels this year. That prices the stock on 13.7 times forecast earnings, with a dividend yield of 3.8%.
That’s significantly cheaper than the FTSE 100 average P/E ratio of 15 and dividend yield of 3.3%.
Buy, sell, or hold?
One big attraction Tesco has for me is that it’s highly defensive. Cyclical stocks such as banks and mining companies often see profits crash during a recession.
In contrast, supermarket profits don’t usually change much. This is because our shopping habits largely remain the same, whatever the economy is doing.
I’d be happy to add Tesco shares to my portfolio at the current price. However, I don’t see any obvious reason for this FTSE 100 stock to keep climbing in September. I’d choose this as a low-risk passive income stock — not a quick flip for growth or capital gains.
