After rocketing 70% can the red-hot Tesco share price hit £4 by Christmas?

Harvey Jones can’t believe how well the Tesco share price has done over the last couple of years and thinks there’s a pretty good chance it could hit a new landmark.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Illustration of flames over a black background

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Tesco (LSE: TSCO) share price is on fire. It’s defied the cost-of-living crisis to climb 30.58% over the last 12 months and a heady 70.22% over two years. I didn’t see that coming, sadly.

As a towering giant in a mature market, I thought Tesco would be more likely to crash to earth than fly to the stars. Especially with Aldi and Lidl nibbling away at its foundations.

Its share of the grocery market is now above 28% for the first time since 2015, according to Kantar. That’s comfortably ahead of the UK’s second most popular grocer Sainsbury’s at 15.2%.

Can this FTSE 100 star keep flying?

Tesco has enjoyed a magnificent turnaround since the dark days of CEO Philip Clarke. Dave Lewis put it back on course after taking over in 2014. Ken Murphy has kept up the good work since October 2020.

With inflation falling to 1.7% in September and the IMF upgrading the UK’s growth forecast from 0.7% to 1.1% for 2024, the outlook’s brighter. Goldman Sachs reckons interest rates could fall to as low as 2.75% next year, which would really give consumers a boost. Lower inflation would cut Tesco’s input costs too.

The recovery is already here, as far as Tesco is concerned, with first-half sales up 4% to £31.5bn, excluding fuel. Retail underlying operating profit jumped 10% to £1.6bn, as cost cutting and productivity improvements offset higher staff pay.

The shares have a trailing yield of 3.4%. That’s a fraction below the FTSE 100 average but Tesco remains progressive, hiking the interim dividend by 10.4%. With almost £2bn of free cash flow, the yield’s forecast to hit 3.72% in 2025 and 4.03% in 2026. Its £1bn share buyback runs until April. Let’s hope for more.

There are dividends and a share buyback too

As ever, neither growth, dividends nor buybacks are guaranteed. Aldi and Lidl are here to stay, and will feast on any weakness. Expectations are high. Inflation may prove stubborn. Any undershoot will be punished. Margins have edged up to 4.1% but, as ever, in this sector, remain wafer thin.

I have a problem when approaching a stock that’s done brilliantly well – and yes, brilliant is the word here. Am I arriving at the party too late?

Tesco’s shares trade at 15.1 times earnings, a fraction below the FTSE 100 average price-to-earnings ratio. They look even better value measured by a price-to-sales ratio of 0.4, which suggests I’d get £1 of shares for every 40p I invest.

The 12 analysts offering one-year Tesco share price forecasts give a tantalising figure of 399.3p, just below the £4 mark. That’s up more than 12% from today’s 355.3p. With a fair wind and a good old-fashioned Santa Rally, the Tesco share price really could hit £4 by Christmas or failing that, at some point in 2025.

With the longer-term view, it shares are look like an unmissable buy and I’ll grab them when I have the cash. In Tesco we trust. I just wish I’d woken up to the opportunity earlier.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Closeup of "interest rates" text in a newspaper
Investing Articles

Here’s why 2025 could give investors a second chance at a once-in-a-decade passive income opportunity

Could inflation hold up interest rates in 2025 and give income investors a second opportunity to buy Unilever shares with…

Read more »

Investing Articles

As analysts cut price targets for Lloyds shares, should I be greedy when others are fearful?

As Citigroup and Goldman Sachs cut their price targets for Lloyds shares, Stephen Wright thinks the bank’s biggest long-term advantage…

Read more »

Investing Articles

Is passive income possible from just £5 a day? Here’s one way to try

We don't need to be rich to invest for passive income. Using the miracle of compounding, we can aim to…

Read more »

Middle-aged black male working at home desk
Investing Articles

If an investor put £20k into the FTSE All-Share a decade ago, here’s what they’d have today!

On average, the FTSE All-Share has delivered a mid-single-digit annual return since 2014. What does the future hold for this…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

One FTSE 100 stock I plan to buy hand over fist in 2025

With strong buy ratings and impressive growth, this FTSE 100 could soar in 2025. Here’s why Mark Hartley plans to…

Read more »

Investing For Beginners

If a savvy investor puts £700 a month into an ISA, here’s what they could have by 2030

With regular ISA contributions and a sound investment strategy, one can potentially build up a lot of money over the…

Read more »

artificial intelligence investing algorithms
Investing Articles

2 top FTSE investment trusts to consider for the artificial intelligence (AI) revolution

Thinking about getting more portfolio exposure to AI in 2025? Here's a pair of high-quality FTSE investment trusts to consider.

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Do I need to know how Palantir’s tech works to consider buying the shares?

Warren Buffett doesn’t know how an iPhone works. So why should investors need to understand how the AI behind Palantir…

Read more »