Tesco (LSE:TSCO) shares have fallen in recent months due to macroeconomic headwinds and geopolitical events in Ukraine. At current levels is the current share price a bargain? Let’s take a closer look.
Tesco share price journey
As a quick reminder, Tesco is the UK’s biggest retailer and one of the so-called big four supermarkets in the UK.
So what’s happening with Tesco shares currently? Well, as I write, the shares are trading for 256p. At this time last year, the shares were trading for 222p, which is a 15% increase over a 12-month period.
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Since the turn of the year, Tesco shares have fallen 11% from 289p to current levels. This is due to the issues mentioned earlier but more on that later.
The bull and bear case
Let’s take a look at Tesco’s share price valuation first of all. At current levels, the shares are on a price-to-earnings ratio of 12. The general consensus P/E ratio for supermarkets is 10 and two of Tesco’s competitors, Morrisons and Sainsburys, are under that ratio.
On the surface of things. the Tesco share price may look expensive, but there are other factors at play. Firstly, I believe Tesco has a competitive advantage as the UK’s largest retailer. Conversely, competition is intense in the supermarket sector and the introductions of rivals such as budget supermarkets Aldi and Lidl have hindered the progress of the big four supermarkets in recent years.
I do understand that past performance is not a guarantee of the future. But when I look at Tesco’s performance, I am buoyed. Since the pandemic struck in 2020, it has managed to grow revenue and profit in 2021 and 2022. Coming up to date, a Q1 trading update for 2023 was positive too. I noted that like-for-like sales in the UK and ROI rose by 1.5% year-on-year and close to 10% over a three-year period. Furthermore, sales of £12.5bn for the quarter was actually greater than in the pandemic.
The current broader macroeconomic picture is one of uncertainty. Soaring inflation, the rising cost of materials, and the supply chain crisis will have a material impact on Tesco and other retailers in the industry. Profit margins could be squeezed, which could affect returns and the Tesco share price. In addition to this, if Tesco passed these costs onto its customers, it could lead consumers to look for cheaper alternatives due to the current well-documented cost-of-living crisis.
One other positive I must note for Tesco is its dividends, which would boost my passive income stream. The current dividend yield stands at just below 4.5%. Dividends are not guaranteed and can be cancelled, however.
What I’m doing now
Should I buy Tesco shares? The competitive advantage, performance record, and passive income opportunity speak to the buyer in me. Current macroeconomic issues and competition are swaying me otherwise.
Tesco shares don’t look like a bargain compared to its competitors. On the other hand, it is a quality company with an unrivalled market position and excellent growth prospects. The old adage you get what you pay for springs to mind here.
I’ve decided I won’t be adding Tesco shares to my holdings currently. The uncertainty linked to the current economic picture is the biggest factor putting me off. I will keep an eye on developments, however.
