Is the Tesco share price the bargain of the year?

Boring but brilliant? Roland Head suggests an exciting growth stock to buy alongside Tesco plc (LON:TSCO).

| 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.

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.

Investment ideas don’t get much more boring than the UK’s largest supermarket, Tesco (LSE: TSCO).

Boring can be good in the stock market, but we all need a bit of excitement. So today I’m going to look at Tesco and at a much smaller retailer that I think could be a long-term winner.

Big and well run

The efforts being made by Sainsbury’s and Asda to merge their operations tell you something about the advantage of being big in groceries.

However, Tesco is already roughly the same size as its two rivals combined. This means that chief executive Dave Lewis doesn’t need to worry about trying to push through complex merger deals, despite regulatory opposition.

Mr Lewis has been able to focus on two areas — operational excellence and finding other routes to growth. In my view he’s accomplished both of these feats. He’s made improvements to the group’s business practices to treat suppliers more fairly, and improved the performance of its supermarkets.

Alongside this, Mr Lewis has acquired fast-growing food wholesaler Booker, which has given the group a sizeable share of the convenience store and restaurant foodservice markets.

Financial turnaround

Tesco’s financial results reflect Mr Lewis’s changes. After falling to a low of £54m in 2016, group sales are expected to have reached nearly £61bn in the year ended 24 February. Profits have bounced back too. Analysts expect the firm’s adjusted earnings per share to have risen by 17% to 14p per share last year.

At the time of writing, Tesco shares trade on 14 times 2019/20 forecast earnings, with an expected yield of 3.1%.

I wouldn’t describe this as the bargain of the year. But I do think the shares remain a decent buy for investors wanting a reliable long-term income.

Wine goes online

Shares in wine merchant Majestic Wine (LSE: WINE) were down by 12% at the time of writing. The shares have now fallen by about 40% in six months as tough trading on the high street has dented the group’s profits.

Today’s fall was triggered by news that the dividend may be cut to fund extra investment in the group’s online business, Naked Wines. This former start-up buys wine directly from winemakers to sell to customers.

Chief executive Rowan Gormley — who founded Naked — has decided to scale back the group’s high street retail business and focus on online growth. The numbers suggest to me that Mr Gormley is probably right to make this decision.

During the six months to 1 October, Naked sales rose by 14% to £75.7m, while retail sales only rose by 1.9% to £122.9m. At this rate, it won’t be long until Naked is the group’s biggest business.

Naked Wines is already Majestic’s most profitable business, with half-year adjusted operating margin of 4.2%, compared to 2.7% for the retail business.

Buy, sell or hold?

The group will be rebranded as Naked Wines and profitable stores will be migrated to trade under the Naked brand.

Are the shares a buy? Perhaps. Given consumers’ growing preference for authentic products with a good story behind them, I think Naked Wines could be a long-term winner. Although earnings visibility is limited, I think the shares could be a long-term buy at under 250p.

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.

Roland Head owns shares of Tesco. The Motley Fool UK has recommended Tesco. 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

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »