It’s been a great year for shareholders of the UK’s largest supermarket chain, with the Tesco (LSE: TSCO) share price trouncing the wider market in 2023. But after rising strongly since July, has this FTSE 100 share surged too far, too fast?
The Tesco share price takes off
In autumn 2022, shares in the UK’s #1 grocer were looking softer than a soggy soufflé. On 7 October 2022, the share price closed at 200.7p. At the time, the company appeared to be covered in the discount stickers it uses to shift perishable goods.
This marked a multi-year low for this stock, which has roared back to life since. Some milestones on Tesco’s recent road to recovery include reaching a 52-week low of 219.96p on 16 December 2022, before racing to hit a 2023 high of 287p on 17 November. That’s a tidy gain of 30.5% in 11 months.
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As I write, the share price stands at 284.6p, valuing the group at just short of £20.2bn. Here’s how the shares have performed over five timescales, versus the FTSE 100:
| Tesco | Footsie | Difference | |
| One month | +3.1% | +0.9% | +2.2% |
| Six months | +8.1% | -1.9% | +10.0% |
| 2023 to date | +26.9% | +0.4% | +26.5% |
| One year | +23.6% | -1.1% | +24.8% |
| Five years | +12.8% | +10.4% | +2.4% |
My table shows that the grocery Goliath’s shares have beaten the Footsie over all periods ranging from one month to five years. And with a nearly 27% return this calendar year, they have absolutely thrashed the wider index in 2023.
Retailing is a tough market
At present, Tesco has a 27.5% market share of the UK grocery market, versus 15.6% and 13.4% for its two nearest rivals. This makes the group the 800lb-gorilla of the grocery sector, giving it extraordinary bargaining power when negotiating with suppliers.
That said, our supermarket sector is among the most competitive globally. With German discounters Aldi and Lidl taking rising market shares (currently 9.6% and 7.8%, respectively), Tesco is under intense pressure. This helps to explain why supermarket margins are in the very low single-digit percentages.
What next?
Looking back over a decade, the Tesco share price has never risen above 325p since 2013. And it’s been rangebound between 150p and 300p since 2014. But after showing sustained strength, perhaps that’s set to change?
At the current price, this stock trades on a multiple of 14.6 times earnings, delivering an earnings yield of 6.8%. The corresponding figures for the FTSE 100 are 10.7 times and 9.3%, so the stock is more expensive than most large-cap peers.
Also, the dividend yield of 3.8% a year (covered 2.4 times by earnings) is slightly below the Footsie’s yearly cash yield of 4%-plus. To me, these fundamentals don’t scream deep value, but neither does this stock look wildly overpriced.
Finally, looking ahead to 2024, will this price momentum continue? I can’t be sure, but a rising tide of market optimism could lift all boats, including Tesco’s valuation. However, I don’t see the shares exceeding, say, 350p next year, as a further uplift of 23% looks too rich to me!
