The Tesco (LSE: TSCO) share price has fallen by around 20% in 2022. It remained resilient in the face of the pandemic, but the current economic crisis is taking its toll.
Where might it go over the next 12 months? On the one hand, Tesco is a strongly defensive stock for a couple of reasons. It sells essentials, which people need whatever the conditions. And it’s the biggest in its sector.
Against that, we’re seeing increasingly squeezed profit margins and growing threats from the competition. It’s at times like these the cheapest can inch ahead.
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I suspect it’ll be a combination of these two things that largely determines where the Tesco share price goes in 2023.
Biggest
Despite the years-long threat from the two main discounters, Aldi and Lidl, Tesco has managed to maintain its market share quite nicely. According to market analytics firm Kantar, Tesco commands 27.2% of the UK’s groceries market.
J Sainsbury is some way behind with 15.2%. And Aldi and Lidl have just 9.3% and 7.4% respectively. Tesco’s home delivery service helped keep it ahead of those latter pair during the pandemic. Is there any likelihood of them entering the digital section of the market too?
Well, Lidl already offers home delivery in some states in the US, so there must be a long-term threat there. But I don’t expect to see it happen in the UK any time soon.
Margins
Tesco released interim results for the current year, which ends February 2023, in October. For the period, we saw a 10% fall in adjusted retail operating profit and a 17% drop in retail cash flow. Its adjusted operating margin declined by 78 basis points.
This is for the six months ended August, and inflation hadn’t hit its peak yet. I expect to see further evidence of margin squeezes when final results are released.
Interestingly though, Tesco appears confident in its cash position. It hiked its interim dividend by 20% and is also returning surplus capital to shareholders via a share buyback.
Valuation
No thoughts on where the Tesco share price might go in 2023 would be complete without a look at the current valuation. Full-year forecasts put the stock on a price-to-earnings (P/E) ratio of about 11.5.
It’s been a fair bit higher in the past, and I don’t see this as a stretching valuation at all. And a forecast dividend yield of close to 5% strengthens that feeling. Analysts also predict rising earnings and dividends over the next two years.
That’s very uncertain, of course. But any evidence to either confirm or refute the City’s analysis could make a significant difference to the Tesco share price in 2023.
Verdict
I’ll be watching for key events, especially full-year results due on 13 April. Before that though, a Christmas trading update on 12 January should be essential reading.
I won’t try to predict a Christmas 2023 share price for Tesco. I just suspect we’ll continue to see modest valuations through the year, in keeping with the recessionary outlook. That could mean plenty more buying opportunities.
