The supermarket sector has been changing in recent times. Tesco (LSE:TSCO) has been seen as a safe investment in the past. Looking at the current Tesco share price, and the challenges the supermarket sector currently faces, should I buy shares for my portfolio?
Tesco share price value
Tesco is the UK’s largest retailer and one of the so-called big four supermarkets. This includes rivals Asda, Morrisons, and Sainsburys. Tesco’s position as the largest gives it a competitive advantage in my opinion. Its financial power and experience are a positive aspect for me. A few years ago, it boosted its offering by adding wholesale business Booker to its portfolio.
As I write, Tesco shares are trading for 253p per share. This time last year shares were trading for 214p per share. That equates to a 18% return for the FTSE 100 incumbent. At current levels, I believe there is value in the Tesco share price for a firm with excellent competitive advantages. Tesco’s price-to-earnings (P/E) is close to 13. It also offers a dividend yield of 4%. This yield is above the consensus 3% average for the FTSE 100 index.
Challenges ahead
The emergence of competitors such as Aldi and Lidl, as well as online-only disruptors such as Ocado, has affected market share for Tesco. This will have also affected the Tesco share price in recent times too in my opinion.
In addition to the competition attempting to eat up Tesco’s significant market share, there is also the issue of rising costs, transportation issues, and Brexit to contend with as well.
Last week, the British Retail Consortium (BRC) said that cost pressures are building for retailers. It has been reported that global food prices hit their highest for seven years. In addition to that, shipping costs have risen threefold since 2019. Brexit could also have a detrimental impact for Tesco. It is reported that new documentation and tougher checks at EU borders could affect transportation as well.
I believe these challenges are credible risks that could affect the Tesco share price and investor sentiment. I do believe Tesco’s competitive advantages, such as its brand value and a coveted nationwide distribution network, will ease any pains.
My verdict
Despite real risks for Tesco and its financials, there is definitely a case for the current Tesco share price to be seen as a bargain. The old adage “too big to fail” springs to mind.
For example, Tesco owns £40bn of assets, which comes in the shape of property, inventory, leases on warehouses, and so forth. Like any business, Tesco does have liabilities. However, the assets as well as Tesco’s business model and track record clearly demonstrate how much would be needed from competitors to overtake it as the UK’s biggest retailer. Furthermore, it possesses the financial power to overcome headwinds from cost, transport, and Brexit pressure.
Overall, I would not buy Tesco shares for my portfolio. The reason is that I would rather invest my hard earned cash into a stock in a sector with less pressure and risk right now. Long term, Tesco may end up being a good investment, but the challenges it currently faces put me off from investing.
