The Tesco (LSE: TSCO) share price has been dipping for a few months, as rising costs are biting into people’s spending power. From a high in January, Tesco shares are down 11%.
But we are still looking at a 19% gain over the past 12 months. And around the same over a five-year period. On both of those measures, Tesco is comfortably ahead of the FTSE 100.
I’m not really too worried that Tesco has given up some of its gains in 2022. I’m really wondering whether the latest weakness might be giving me a buying opportunity.
So what do I think might stop the rot and get the Tesco share price heading up again?
Profit uncertainty
In April, Tesco offered its guidance for the 2022/23 year “in the form of a wider than usual range“. That’s because of the “significant uncertainties in the external environment“.
It suggests adjusted retail operating profit of between £2.4bn and £2.6bn. That falls below the 2021/22 figure of £2.65bn. But it would still be way ahead of the £1.96bn from the previous year.
Retail free cash flow is expected to be unchanged, in the £1.4bn to £1.8bn range.
Are folks fearing downgrades as the year progresses? We have until 17 June to wait for a Q1 update, with interim results not due until October. That leaves plenty of time for uncertainty to continue.
But I reckon any tightening of those guidance ranges could help the Tesco share price. As would an absence of downgrades.
External factors
The uncertainties are largely down to external factors, particularly cost inflation. We also have customer behaviour that has still not fully readjusted to the post-pandemic retail world.
Tesco needs to remain price competitive, with Aldi and Lidl breathing down its neck. And that could see margins being shaved.
I hope inflation will peak this year, and even fall back a bit subsequently. If that happens, again I can see Tesco shares getting a boost.
I don’t pay much attention to external factors like these, myself. They affect everyone, and there’s nothing we can do about it. And one thing that has always happened to economic shocks through my lifetime is they revert to the norm.
Liquidity
Tesco took its results announcement as an opportunity to confirm its liquidity position. The company had, at the time, purchased £300m of its own shares as part of its ongoing share buyback programme.
Tesco has now committed to buying back a further £750m of shares over the next 12 months. Year-end net debt fell 12%, and the dividend was hiked by 19%.
I think that’s an impressive show, but I guess investors are now expecting balance sheet strength to wobble a bit. If that does not happen as the year progresses, again I see another lift for the shares.
Saying all this, we could see any of these three factors turning worse rather than better. And that could prolong the Tesco share price dip.
But on balance, Tesco makes my list of buy candidates.
