Shares in supermarket giant Tesco (LSE: TSCO) have risen 30% from the 190p low seen at the end of last year. The FTSE 100 firm’s share price has continued to climb following last week’s full-year results. I’ve been taking a fresh look at the stock. Should shareholders expect further gains, or is the firm’s recovery now complete?
A new look
Five years ago, Tesco was bloated, laden with debt, and hated by many of its suppliers. Chief executive Dave Lewis has changed all of this. He’s cut £1.3bn of costs, improved the firm’s business practices, and ditched some of its overseas operations.
To help fuel long-term growth he’s acquired fast-growing wholesaler Booker and set up a partnership with French supermarket group Carrefour. Debt levels have tumbled and the group’s profit margins and cash generation have improved sharply.
Lewis says that the firm has now met most of its turnaround goals. He’s “very confident that we will complete the journey in 2019/20.”
Two new opportunities
My colleague Kevin Godbold believes Tesco’s growth may slow as its turnaround completes. I’m not so sure. Last week’s results suggested to me there are at least two routes open to boost profits and shareholder returns.
A recent report in The Sunday Times suggested the company is working on a loyalty scheme similar to Amazon Prime. Tesco hasn’t denied this. The suggestion is that the firm’s Clubcard offering could be expanded to tempt shoppers to sign up to the group’s banking and mobile phone services. I think this could be big.
The second opportunity is for the firm to increase shareholder returns. Tesco’s strong cash generation and low debt levels suggest to me it may soon be able to return spare cash to shareholders through share buybacks or special dividends.
In my view, the outlook remains positive. Trading on 14.5 times 2020 forecast earnings with a 3% dividend yield, I view Tesco stock as fairly priced. I remain a long-term buyer.
Dull but profitable?
Like Tesco, small-cap Carr’s Group (LSE: CARR) operates a fairly dull business in a mature sector of the market. This £140m group has two divisions, agricultural supplies and engineering, with a focus on remote handling equipment for the energy industry.
Carr’s doesn’t attract much attention, but the firm’s shares have risen by more than 300% over the last 10 years. By contrast, Tesco stock is still worth 25% less than it was 10 years ago.
I see Carr’s as a stock you could safely buy and forget for another decade. The firm’s half-year results, published today, confirm that view. Adjusted pre-tax profit rose by 4.5% to £11.4m during the six months to 2 March and the interim dividend will rise by 4.7% to 1.125p per share.
Although demand for agricultural feed was lower than usual due to the warm winter, the group’s engineering division turned in a strong performance with “significant improvement in UK manufacturing” and a “major USA $8.5m contract win” for a remote handling customer.
Carr’s shares have dipped slightly today and currently trade on 10.5 times forecast earnings, with a 3.2% dividend yield. The group has stable profits and a strong balance sheet. I see this as the kind of ‘boring’ stock that could help you retire early.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head owns shares of Carr's Group and Tesco. The Motley Fool UK owns shares of and has recommended Amazon. 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 2019