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This is what I’d do about the Tesco share price right now

Alan Oscroft
Businessman selecting a Sell symbol

It’s been a tough Christmas trading period for our top listed supermarkets, struggling under a wave of general retail malaise plus the onslaught from Lidl and Aldi.

Market reactions to the latest updates from Sainsbury’s and Morrisons were somewhat subdued, with both seeing their share prices slip back a little on Wednesday when their updates were released.

But the response to a festive season update from Tesco (LSE: TSCO) Thursday was met with a bit more optimism, with the shares gaining a few pence. On the face of it, though, it’s hard to see a reason for much excitement.


Chief executive Dave Lewis said: “In a subdued UK market we performed well, delivering our fifth consecutive Christmas of growth,” adding that “this Christmas we had the biggest ever day of UK food sales in our history.

But looking at the figures, total UK and Republic of Ireland sales in the Christmas trading period rose by only 0.2%, and by 0.4% on a like-for-like basis. Tesco branded sales in the UK itself (excluding Booker) were flat in total, with like-for-like sales up by just 0.1%.

In international markets, the story was one of falling sales, with the third quarter plus the Christmas period adding up to a 1.5% fall (0.9% like-for-like).

While figures like these might not exactly have me rushing for the ‘buy’ button, I do think some cautious optimism is called for. In perhaps the toughest Christmas for the retail trade for a decade, plus the most chaotic Brexit year we’ve had so far, coming back with what is essentially a flat set of figures seems very much acceptable.

Tesco best?

Were I considering an investment in a supermarket business, I think Tesco is the one I’d go for. And on that front, I pretty much agree with all the reasons my Fool colleague Roland Head has suggested for preferring the UK’s biggest supermarket chain over Sainsbury’s.

And if I wouldn’t buy the second biggest in Sainsbury’s, I certainly wouldn’t buy Morrisons, which down in fourth place behind Asda and now on an equal footing with Aldi.

But would I really buy Tesco? Hmmm.

Earnings growth since Tesco hit bottom have been good, and a 23% EPS rise on the cards for the year to February 2020 even puts the shares on a PEG ratio of 0.6. That compares the P/E ratio to expected EPS growth, and a value of 0.7 or less is typically seen as a very attractive figure by growth investors.


But that has to be tempered by the fact that this is recovery-led growth, which should end when the company gets back to a steady state. As it happens, the EPS growth forecast for the next two years slips back to 8% followed by 7% — still healthy, but certainly levelling off.

There’s the attraction of the dividends, with a 3.2% yield suggested for the current year, and that’s excellent progress since the annual payment was reinstated in 2018.

But, in such a competitive business, I’d only invest in the one with the very best prospects. And today, that’s either Lidl or Aldi, neither of which I can buy. I think it’s a mistake to act as if they’re not there and buy only the best of what’s available, so I’d buy none in this sector.

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Alan Oscroft has no position in any of the shares 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.

Motley Fool UK 2020