Why I believe the Tesco share price could soon return to 300p

Rupert Hargreaves explains why he believes the Tesco share price could soon rally back above 300p as demand for the company’s services booms.

| 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.

It looks as if the Tesco (LSE: TSCO) share price is on offer right now. Shares in the UK’s largest retailer have plunged, in line with the rest of the market over the past few weeks.

However, while other companies are struggling in the current environment, Tesco appears to be thriving.

Tesco share price recovery

Figures suggest UK consumers have increased their food buying by more than 60% year-on-year in the past few weeks. As the largest food retailer in the UK, Tesco could benefit disproportionately from this.

What’s more, management estimates the government’s business rate tax holiday will boost the group’s bottom line by around £500m this year. For some comparison, last year the company earned a total net profit of £1.3bn.

Unfortunately, it’s not all good news for the Tesco share price. Disruption to operations from staff sickness, as well as the extra costs of hiring thousands of new staff to deal with the increase in demand, will hit the bottom line. The retailer has increased the size of its workforce by a staggering 10% over the past 10 days.

It’s also likely the group’s Booker wholesaler division has seen a significant drop in demand. The business primarily caters to small businesses in the leisure sector. As the government has ordered most of these operations to shut up shop to contain the spread of the coronavirus, Booker may be struggling.

That said, Tesco’s logistics network is second to none, and some of the retail sector’s most experienced minds are in charge of operations. This implies the group could have worked to offset falling demand in one section of the business by shipping goods to other stores.

Undervalued

We’ll have to wait and see what the impact of the above will be on Tesco’s bottom line. However, at this stage, it looks as if the company might come out from this crisis in a better position than it was at the end of 2019.

On top of the tax break and demand boost, Tesco is also in the process of selling its Asian business. The £8bn deal will shore up the group’s balance sheet, and management has even hinted at a £5bn special dividend. That suggests investors are in line for a special payout of around 20p per share.

After recent declines, Tesco share price is trading at a price-to-earnings (P/E) ratio of 13.4. That’s compared to its five-year average of around 20.

Based on current City earnings estimates, if the Tesco share price returns to a P/E of 20, it could be worth as much as 340p. These estimates could unstate the firm’s potential at this stage. Including the 20p special dividend, this suggests the stock has an upside of 63% from current levels.

So, if you looking for a defensive, undervalued investment, it could be worth taking a closer look at Tesco.

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.

Rupert Hargreaves owns no share mentioned. 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 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

As Lloyds’ share price tumbles 14%, is this an unmissable opportunity for me to buy at a bargain-basement price?

The Lloyds share price is substantially below its year high, but decent earnings prospects should drive its price and dividend…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »

Closeup ruffled American flag representing US stocks and shares
Investing Articles

2 UK stocks that could rise if Harris wins the Presidential election

Royston Wild believes these UK stocks could receive a bump if Kalama Harris wins the Presidency, giving their share prices…

Read more »

Investing Articles

After a 96% plunge, is buying more Aston Martin shares throwing good money after bad?

Just two weeks after buying Aston Martin shares Harvey Jones found himself nursing a painful loss. Yet after recent news…

Read more »

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »