Tesco Share Price Hits Record High

UK retail stocks are performing well, with major players hitting multi-year highs. Tesco (LON: TSCO) shares recently surged to a record high of 316p, marking an increase of almost 20% from its lowest point this year and a 74% rise from its 2022 low.

Sainsbury’s stock climbed to 270p, just 30 pence below its all-time high while Marks & Spencer (MKS) is also nearing its peak. Similarly, in the U.S., retailers like Walmart and Costco are trading near their record highs.

The Tesco (LSE: TSCO) share price is approaching a potential new 10-year high. Back in late July 2014, it traded around 330p, just a few percentage points above the current 318p price. Considering the current high price, what could lie ahead for Tesco’s shares? 

Macroeconomic factors influencing Tesco

Tesco, the largest British retailer, has performed well in recent years as the British economy shows signs of stability. Data released recently showed that the UK GDP increased from 0.0% in April to 0.4% in May, expanding by 1.4% compared to the same period in 2023.

These figures indicate the country is doing modestly well, exceeding consensus estimates. As the largest retailer in the country, Tesco benefits when the economy is thriving since consumer spending is a major component of GDP.

Tesco is also benefiting from current inflation trends. Recent data showed that UK inflation dropped to 2.0% in May, with the downtrend likely to continue. Retailers benefit from low inflation as it boosts consumer spending.

Low inflation also increases the chances of the central bank cutting interest rates. Economists predict the bank might reduce rates at the upcoming meeting on August 1st.

Turnaround efforts continue for Tesco

Tesco is making positive internal moves that contribute to its strong performance. Earlier this year, the company received £700 million from Barclays by selling its banking division.

This was a good move because it left a leaner company that can focus on retail and wholesale business, Booker. Investors also benefited, receiving the bulk of these funds through dividends. Additionally, Tesco is also buying back lots of its stock, and has started buying back shares worth £450 million.

Tesco, which controls 27.6% of the UK grocery market, is also gaining market share in other sectors. In its most recent results, Tesco reported that its market share increased to 27.6%, with 15 consecutive months of gains. Food sales rose by 5% during the quarter.

The first quarter results showed a 3.4% rise in total sales to over £15.3 billion. UK revenue increased by 4.6% and the ROI segment grew by 4.4%. Booker was the worst-performing business as its revenue fell by 1.3%.

Analysts and management believe Tesco will continue its steady growth in the coming years. Despite recent share price growth, Tesco stock remains undervalued. According to Finbox, the company boasts a P/E ratio of 12.2, which is below the FTSE 100 index average of 15 and more affordable than global peers like Walmart and Costco.

Will Tesco’s share price hit a 10-year high in 2024?

The Tesco share price has seen impressive growth lately, rising from 200p less than two years ago. Now nearing a 10-year high, it’s worth considering if the current price is too high.

The Tesco (LSE: TSCO) share price is increasingly close to hitting a new 10-year high. Back in late July 2014, it traded at around 330p, only slightly above today’s 318p price. But with the price now so high, what might the future hold?

Evaluating the stock’s price

There are several ways to assess whether a stock is currently trading at good value, meaning the price appears to be lower than it should be and has growth potential.

However, these metrics normally use past, or trailing, data that may not indicate future performance. Therefore, they should be combined with other information about the industry, management, and board decisions to get a comprehensive view.

Price vs earnings growth

A valuable yet under-used metric is the price-to-earnings growth ratio (PEG). This ratio compares the price to the rate at which earnings are increasing, providing a more accurate representation of company performance over time, instead of just at a point in time. If the price and earnings growth are equally matched, this metric will be one. A ratio higher than one suggests the price is growing faster than earnings and may be overvalued.

Tesco currently has a PEG ratio of 4.4 and a P/E ratio of 12.4. While the low P/E ratio suggests the stock is undervalued, the high PEG indicates that the price is exceeding earnings growth. This implies that shareholders are confident in Tesco’s future earnings growth, but that doesn’t mean the price will increase. In comparison, its competitor Sainsbury’s has a PEG ratio of 1.8, and a P/E ratio of 45. It’s had slow price and earnings growth but still appears overvalued due to recent earnings falling short of analyst expectations.

Future return on equity

Return on equity (ROE) is crucial because it provides a clear indicator of how well a company is using shareholder equity. ROE is calculated by dividing the latest annual income figure by the average equity over a year. Forecasting future ROE involves making assumptions about the company’s ongoing operations.

Analysts expect Tesco’s future ROE to be approximately 18% in three years, up from the current 15%. This forecast compares favourably with the average ROE of 11% for stocks in the FTSE 100 index. However, it’s important to recognise that unforeseen events could influence these projections, so it’s important to evaluate the stability of the industry as well.

Retail in the UK

The retail sector, especially grocery stores, is known for its defensive characteristics. Even during economic downturns, people need food so the industry has historically remained strong. And at 27%, Tesco’s market share is substantial, so it would take a serious issue to disrupt it. This is up from 25.8% in 2020, despite four years of economic uncertainty and disruption.

Overall, Tesco remains a preferred choice for investors looking for reliable, long-term returns. It sits at the top end of a range it’s been trading in for five years with little indication of further upward movement.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication.