These are testing times for Tesco (LSE: TSCO) and its share price. Down 17% over the past year and there’s little reason to see it doing anything but continuing to sink, at least in this Fool’s opinion.
Look, I get it. For some investors, grabbing a slice of Britain’s biggest retailer may appear too good to be true. It might not be the all-conquering monster of yesteryear, but Tesco still has the scale to make a big impact on the grocery market. Besides, in chief executive Dave Lewis it has a leader whose genius has already dragged the supermarket off the canvas once before.
And right now, the FTSE 100 giant offers up, on paper at least, some terrific value. At current prices, it changes hands on a forward P/E ratio of 12.7 times, below the broader blue-chip average around 14.5 times. No wonder dip buyers have emerged to take Tesco away from its recent eight-month share price lows.
I’m not so sure that the share price erosion of recent times has fully run its course, however.
Times are extremely tough for Britain’s retailers as Brexit considerations damage consumer confidence and cause them to tighten the pursestrings. Latest Kantar Worldpanel data illustrated this perfectly, showing domestic grocery market sales contracting 0.5% in the 12 weeks to July 14. This was the first time the market had declined since mid-2016.
It’s anyone’s guess as to how long cross-market pressure lasts as the chances of a calamitous no-deal Brexit grow. For Tesco, however, the bigger threat to its growth prospects — certainly in the long term — comes from an increasingly-competitive grocery sector that’s crushing margins and destroying its once-loyal customer base.
A blue chip to retire on
Clearly Tesco will require Herculean levels of effort, boatloads of cash and more than a pinch of good fortune to turn around its failing fortunes. So numerous, and frankly colossal, are its troubles that I’m not backing it to return to its former glories any time soon, if at all.
WPP (LSE: WPP), on the other hand, is a FTSE 100 fallen giant I believe has all the tools to recover its previous might.
He’s been in charge for less than a year, yet under chief executive Mark Read, the business is making terrific progress in cutting the bloat and casting aside the scattergun approach of industry veteran Martin Sorrell. Divestments have been stepped up to create a sharper business with less debt on the books, and there have already been 44 since May 2018. WPP’s also overhauled its product to provide a more ‘integrated’ service to its clients and doubled-down on the fast-growing digital advertising market too.
It might be too early to say that the broader ad market’s bouncing back, but major contract successes with the likes of eBay, Instagram and L’Oréal suggests that WPP has one foot back on the road to recovery. And I reckon things will only get better as the business continues on its three-year turnaround plan.
A side note: at current prices WPP trades on a sub-10 forward P/E ratio and carries a corresponding dividend yield of 6.2%. Such readings reinforce my belief that it could generate some seriously-brilliant shareholder returns in the years ahead.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has the following options: short October 2019 $37 calls on eBay and long January 2021 $18 calls on eBay. The Motley Fool UK has recommended eBay and 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 2019