The Tesco (LSE: TSCO) share price corrected a bit after it released its annual results on Wednesday. As I write this Thursday morning, it has fallen further in early trading. The stock has still made some gains over the past year, to be sure. But it is down by almost 13% since the highs seen earlier this year.
Tesco share price falls on lower earnings’ estimates
There are risks that the stock could decline further too. The FTSE 100 grocer expects adjusted retail operating profit in 2022-23 to be between £2.4bn and £2.6bn, which is less than the £2.8bn seen in the last year. Retail profits form a bulk of the total, while Tesco bank contributed a small amount this year as well.
One of the reasons for the reduced expectations is cost inflation. The UK’s annual inflation came in at a massive 7% yesterday for March, so this is no trivial matter either. Cost pressures for the company could get worse over the year, going by the ugly inflation forecasts in place. At the same time, rising cost of living could slow down consumer purchases as well.
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I do, however, believe that a more holistic look at the earnings’ projections is required. Last year saw a fairly big increase in its retail adjusted operating profit of 35%. This was a bit of an aberration, presumably driven by an increase in consumer spending on groceries during lockdowns.
Since times have normalised now, some decline was to be expected. And frankly, I think even then the expected hit to profits is not all that big. Even if the number comes in at the lower end of the range, it is still ahead of what we saw in 2020-21.
Fairly valued FTSE 100 stock
Tesco share price valuation also looks fine right now. At 13.6 times, the price-to-earnings number is actually below that for the FTSE 100 level of 15 times right now. Besides this, I think the stock might look even more attractive if the economy slows down from here. While there is little doubt that it will be impacted if consumers spend less, there is a floor to how much of the grocery bill can be cut. It could make for a good semi-defensive stock to hold.
In light of a fast changing situation though, if I were being really cautious, I would like to wait and watch for the direction that the Tesco share price takes for now. This is particularly so keeping in mind the decline in projected earnings. According to my rough estimates, it might just be a bit overvalued if the earnings come in at the lower end of the range, or fall more than expected.
But that is only if I am super careful. With an average risk profile, I reckon the Tesco share price is in an attractive place for me as an investor. And it does not hurt that the stock has a dividend yield of 4% either. I would buy it.
