Shares in UK supermarkets giant Tesco (LSE:TSCO) have been on an upward trend in recent months, with the stock now valued at 10% higher it was a year ago.
This share price rise comes as competitors in the UK market have been upping their game — the likes of Aldi and Lidl have been moving in on Tesco’s territory, but the company has been more than holding its own.
With the shares currently trading at 235p, is now a good time to buy into the Tesco share price or would my money be better invested elsewhere?
Outgoing CEO Dave Lewis has been credited with turning Tesco’s fortunes around with a series of cost-cutting strategies and taking the fight to the cheaper German alternatives.
The company’s balance sheet has seen significant improvements under Lewis’s tenure and some are asking whether this can continue following his departure. The surprise decision of Lewis to step away from the business spooked investors, although he will remain in charge until summer 2020. He will be replaced by Boots veteran Ken Murphy.
Reasonably impressive quarterly results were announced by Tesco last month, with operating profit increasing 12.6% to £1.13bn on flat revenues of £31.9bn. Group operating profit before exceptional items was up 25.4%.
Tesco also hit its margin target of 3.5% to 4% a full six months ahead of schedule, although like-for-like sales in the UK were lower than expected.
The dividend offered by the company appears solid after a dividend hike earlier this year, with the yield set to hit 3.3% for the fiscal year 2020.
The supermarket chain still holds a significant market share over its competitors, controlling 27% of the market, according to data from research firm Kantar.
However, it must be noted that Tesco’s market share has been falling, most recently for the 12 weeks until 3 November, falling from 27.5% on a year-on-year basis.
While most of the main players in the supermarket industry also saw a loss of market share, Aldi and Lidl are continuing to grow and chip away at the more established chains.
Tesco has clung on to share to a certain extent with many consumers valuing its shopping experience over the cheaper products offered by the German alternatives, but the reality is that the down trend is likely to continue in the coming years.
Tesco shares don’t look particularly expensive at the moment, trading on a forward P/E ratio of 17, but similar companies such as Sainsbury’s look more affordable at less than 10.
Lewis will be a difficult act to follow for the incoming CEO, and the risk is that he is getting out as he has possibly taken the share price as far as it can go with limited room for growth over the long term.
On that basis I would hold off on buying into the Tesco share price as it currently stands, particularly with the ever-looming threat of Brexit still firmly on the horizon.
conorcoyle 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 2019