Hi, I’m Christopher Luke Johnson. This is Stock of the week.
The latest inflation figures out today show that food prices are rising at more than 5%, which puts UK supermarkets like Tesco TSCO in the spotlight.
Morningstar analysts have just reinitiated coverage of Tesco alongside other European grocery stocks, making it their top pick in the sector. Tesco’s stock price is up nearly 19% so far this year, outperforming the Morningstar UK Index’s 16% return.
Yet in this environment of ever-increasing food prices, is Tesco stock a Buy, Sell, or Hold?
Is Tesco Stock, a Buy, Sell, or Hold?
According to Verushka Shetty, equity analyst at Morningstar, Tesco stock is trading in three star-territory, suggesting the stock is fairly valued. But at around 440p, the stock is currently trading above Morningstar’s 407p fair value estimate.
In her view, Tesco has completed a successful turnaround by reorganizing the business, shutting down unproductive international subsidiaries, and reassessing its UK store footprint.
Investors can expect more news on food price inflation and the turnaround plan when the company reports six-month results in early October.
What Is Tesco’s Strategy?
According to Kantar data, Tesco is the UK’s largest supermarket by market share, ahead of Sainsbury’s and Asda. The business has also successfully staved off fierce competition from German discounters, Aldi and Lidl, despite elevated UK inflation and increasing food prices.
Yet Tesco has become a haven for price-sensitive customers with its own Aldi Price Match promise, a Low Everyday Prices campaign aimed at budget shoppers, and Clubcard deals with a focus on price.
And at the same time, it has simultaneously managed to pull increasingly cost-conscious customers away from the likes of Waitrose and M&S, with its higher-end Tesco Finest range.
Tesco’s full year results showed profit before tax reached over £2.21 billion a 3.2% drop from figures the year before. Tesco Finest annual sales hit £2.5 billion, representing a 15% year on year increase.
The business also reported a jump in Clubcard sales across all markets, which includes an 84% climb in the UK, an 87% increase in the Republic of Ireland, and an 88% rise in Central Europe
Why Is Tesco the Dominant UK Grocer?
While the supermarket is not awarded an economic moat, Morningstar’s Shetty says the sheer size of Tesco, with over 4,000 stores, means it can spread advertising and distribution costs over a larger revenue base, it has a dominant market position in online grocery shopping, and its returns profile is stronger than it was a decade ago.
Yet, despite Tesco’s position, the UK grocery market remains fiercely competitive and with the all-important festive trading season just around the corner, investors will no doubt be keeping a close eye on how Tesco fares at this critical time of year.
Thanks for watching.
