The Tesco (LSE: TSCO) share price has put in a stunning performance over the past few weeks. Since the beginning of June, shares in the company have returned around 15%.
Following this performance, shares in the supermarket retailer have produced a total return of 12.4% over the past 12 months.
Tesco share price interest
It looks as if shares in the retailer have pushed higher recently as its peers attracted interest from private equity companies. Morrisons is in the process of being bought out by a consortium of private equity firms, while there’s been speculation Sainsbury’s will succumb to the same fate. But, as of yet, no offer has emerged.
Tesco has yet to be mentioned as a potential buyout target. But that doesn’t mean the company’s immune to a takeover. The group’s portfolio of freehold property and the potential to generate over £1bn a year in free cash flow could be desirable qualities for any buyer.
I think this is the main reason why the Tesco share price has been pushing higher recently. The company may not be the subject of a bid just yet, but the stock’s looked cheap for some time. It appears as if the market is finally starting to realise this business could be undervalued. It seems to be re-evaluating the stock’s prospects as a result.
I believe this trend could continue. At the time of writing, the retailer is selling at a forward price-to-earnings (P/E) multiple of 13.4. Even though its valuation has increased in recent weeks, it’s still below the five-year average of 16. Further, the stock offers a dividend yield of just under 4%. I think that looks attractive in the current interest rate environment.
Management has also hinted at the prospect of additional dividends and share repurchases as the company continues to generate high levels of free cash flow.
I think the Tesco share price continues to look cheap, despite its recent performance. As such, I’d buy the stock for my portfolio today.
Growth headwinds
However, I’m aware the business faces several headwinds, which could impact growth as we advance. These include rising costs for staffing and transport, which could hurt the firm’s slim profit margins and reduce cash flow.
Rising food costs could also lead to reduced customer spending. This would impact overall sales growth. And finally, competition in the UK grocery sector is fierce and only growing. This limits the company’s ability to raise prices if costs do rise.
Even after taking these risks into account, I think the Tesco share price looks attractive. While it seems unlikely an offer will emerge for the whole company, as the UK’s largest supermarket retailer, the group has an unrivalled position in the market. It can leverage this competitive advantage to enhance growth going forward.
