Tesco share price forecast: where next for the doyen of UK groceries?
Updated
Disruption in its distribution centres in the run up to Christmas did little to damage the business of leading UK retailer, Tesco as it reported a 2.3% increase in sales in the third quarter. However the market was strangely unimpressed marking it with just a 1.4% rise and then taking it all back the next day.
Today (25 January) the Tesco share price stands at 291p. Concerns over rising inflation and how that might affect sales could dampen enthusiasm for the stock. While this is unlikely to impact greatly on the food essentials which are required inflation or not, it is the litttle extras and luxuries that may fall away. On the plus side Tesco is reporting it has its highest market share in four years.
Investors will also be pleased to hear that the profit forercast has been revised upwards based on strionger sales. "We now expect retail operating profit slightly above the top-end of our previous £2.5bn to £2.6bn guidance range," said the company.
Tesco's stock price has been slowly recovering over the past five years and has a strong second half of 2021 rising 31% from June to year end.
It follows a downtrend that started way back in 2007 and which finally hit bottom in early 2016, a period when the retail landscape in the United Kingdom became increasingly competitive. In recent weeks it has risen from 220p in July to over 280p today (7 December).
In May 2021 the company remained the leading UK grocery store, with a market share of 27% according to Statista figures from May 2021. An ongoing digital transformation is sweeping the entire industry, however, forcing Tesco to engage in multiple initiatives to keep its leadership.
Price drivers for TSCO stock
The following is a summary of the factors that could influence the price of Tesco stock in the future.
1. Competition
Tesco’s closest rivals by market share are Sainsbury’s at 15.3%, Asda at 14.8%, Morrisons at 10% and Aldi at 8%. These companies held a combined market share of just over 48% in May 2021, according to statista, and could affect Tesco’s performance if they push forward with initiatives to increase their share of the UK grocery market, where Tesco is currently the leader with just over 27%.
Moreover, the increasingly threatening presence of online grocery retailers such as Ocado and Amazon’s Fresh service could also reduce Tesco’s dominance and have a knock-on effect on its market capitalisation.
2. Higher logistics costs
The ongoing HGV driver shortage may force Tesco to increase lorry drivers’ wages. The company has already offered a £1,000 signing-on bonus for new drivers who join the company before 30 November 2021, and it's possible that other costly incentives may be needed in the future to attract workers.
Moreover, the cost of third-party transport services could increase. If Tesco relies on their services to keep the distribution network functioning properly, it could hurt the company's bottom-line over the medium term and influence its share price.
3. Driver shortage: knock-on effects
The shortage of hauliers is likely to have a ripple effect across multiple industries. For Tesco, the situation could affect fuel sales, which account for more than 8% of the company’s revenue. Product availability could also become a problem if suppliers are unable to deliver their goods on time.
It’s a challenging scenario for all grocery stores and the lack of drivers could damage all the chains’ results, including Tesco’s, if the shortfall in labour isn’t resolved in the next few weeks.
4. Online offering
Tesco experienced a significant jump in the volume of sales coming from its digital channel during the pandemic. According to the latest annual report, the firm’s online sales experienced a 77% year-on-year jump in 2020 that resulted in annual online sales of £6.3bn ($8.48bn). This number represents around 12.5% of the group’s total sales last year.
Tesco’s management has said that it expects a deceleration in some of the volumes it gained at the height of the Covid-19 crisis, but according to a report by Mercatus, the boost to online sales could be more permanent.
It noted that “online grocery will account for 21.5% of total grocery sales by 2025 – an estimated $250bn – which is a more than a 60% increase over pre-pandemic estimates”.
Whether Tesco continues to benefit from this trend to digital, may depend on whether it sticks with making investments that ramp up its capacity to deliver and serve online shoppers. If it does and online sales carry on building, this could have a positive impact on the firm’s top-line results over the long term.
5. Tesco strategic goals
In 2018, Tesco outlined strategic drivers to create long-term value for its shareholders. They included generating £9bn in cash from operations and increasing the group’s operating margin to between 3.5% and 4%.
The successful execution of these goals could boost Tesco’s share price, but have they been achieved?
By the end of last year, the company generated only just over a third of that cash flow target – £3.64bn retail operating cash flow as opposed to £9bn. Its operating margin was only slightly off its target of 3.5%-4%, at 3.1%. In the 2020 financial year, however, the company had smashed that target by reaching a 4.6% operating margin.
6. Strike action
A wage dispute with staff at half of the company's distribution centres could seriously disrupt the retailer unless agreement is reached. Christmas is the busiest and most intensive retail period and is crucial to Tesco. The trade union USDAW said its members had rejected a 4% pay offer and its action could affect nine depots. Members of the Unite union are taking action at 13 of the depots.
Tesco says its offer is fair.
A closer look at Tesco’s fundamentals
Revenue
Tesco’s revenue has grown slowly over the past five years, reaching £57.9bn by the end of the 2021 financial year compared to £55.9bn by the end of 2017.
The UK is the largest market for Tesco’s grocery and retail operations and accounted for more than 90% of its revenue by the end of the 2021 financial year. Other revenue segments include revenue from Central Europe and Tesco Bank.
Cash flows
Tesco’s latest annual report showed net cash used in operating activities (before exceptional items and other similar adjustments) as being £2.84bn. Upon adjusting for these exceptional charges, the group’s total net cash generated from operating activities stood at £415m by the end of the 2021 fiscal year. This figure represented an improvement compared with the negative £515m reported the previous year.
The company also reported free cash flows of £1.38bn on an adjusted basis for 2021 resulting in a deterioration of its free cash flow generation capacity compared with the £1.97bn reported the year before.
Solvency and liquidity
By the end of 2021, Tesco had total long-term borrowings of £14bn including loans and leases. Total assets by the end of the same period stood at £45.8bn, including £2.5bn in cash and equivalents and £1bn in short-term investments.
None of the company’s bonds are due this year and the next maturity is set to occur in February 2022 on a £417m medium-term note (MTN) – a debt note that usually matures and is paid back in five to ten years.
Based on these schedules and the firm’s strong cash position, Tesco’s solvency is not in question at the moment.
Dividend
Tesco stock currently generates a dividend yield of 3.9% that is paid every six months. Last year, the company declared a special dividend of 50.93p. This payment is not considered part of the forward dividend calculation as the board is not expected to approve any special dividend this year.
Valuation
At its current market capitalisation of £22.25bn, Tesco is valued at 14.5 times its 2021 free cash flows and at 20 times its net earnings from last year, before including exceptional items.
The company’s net profits last year surged to £6.15bn amid the sale of business interests in Thailand and Malaysia.
Management
Tesco’s senior management team includes the following officers:
Ken Murphy – group chief executive officer: Murphy was appointed CEO of the group in October 2020, replacing David Lewis. Murphy has a background in the retail industry, including multiple executive roles at Walgreens Boots Alliance.
Imran Nawaz – chief financial officer: Nawaz was appointed CFO of Tesco in May 2021. He has a long-standing track record working in different commercial finance positions in companies such as Kraft Foods and Tate & Lyle.
Alessandra Bellini – chief customer officer: Bellini was appointed four years ago as the leader of Tesco’s image and brand positioning efforts. Her background includes many years in different marketing-related roles at Unilever, including as vice-president for the food category of the firm’s North American operations.
This relatively new senior management team has to prove that it can deliver on the promises made by some of its predecessors. These include strengthening the brand’s positioning and reducing operating expenditures to maintain margins within the company’s long-term targets.
Performance
In 2020, Tesco’s stock declined 5.4% amid the broad-market weakness that European stocks experienced as a whole during the pandemic. Notably, its performance was better than that of the FTSE 100, which declined 14% during that same period.
Tesco’s stock underwent a consolidation in February and has jumped nearly 14% so far this year, outperforming the FTSE 100, which is 7.6% up year to date.
On 6 October Tesco reported a strong first half leading it to upgrade in its full-year profit expectations. The group is now forecasting a full-year 2021-22 retail operating profit of slighly above £2.6bn.
Tesco made a retail operating profit of £1.39bn in the first half. Sales in the first six months of Tesco’s financial year rose 2.6% to £27.3bn, while UK like-for-like sales rose 1.2%. Tesco said net debt had been reduced by £1.7bn since February reflecting strong cash flow. Shares rose 1.3% over the day.
Tesco share price prediction: analysts’ views
Before those results came out, Sophie Lund-Yates, equity Analyst from Hargreaves Lansdown, commented on Tesco’s performance as part of a report released on 29 September this year.
The analyst noted that it will hugely depend on sales growth. “Sales were up 1.1% on a like-for-like basis in the first quarter. That’s because the group’s lapping the exceptional demand seen in the early days of lockdowns. We wonder if Tesco has managed to keep sales pushing forward in the second quarter – especially online sales.”
Lund-Yates added: “A lot of money’s been funnelled into digital expansion recently, so Tesco needs online sales growth to match. We also wonder if the recent petrol (gas) crisis will have any impact on Tesco’s full-year outlook. Finally, we’ll be keeping an eye on Tesco Bank. The pandemic hit lending activity, which led to increased provisions for bad debts. This hurt profits in the division and we’d like to see if this trend has reversed.”
Giving her view on the Tesco share price prediction, AJ Bell financial analyst Danni Hewson told Capital.com:
Tesco share price forecast: analysts’ price targets
According to data from MarketBeat, the average 12-month Tesco stock forecast stands at 315p per share, with the highest estimate standing at 330p and the lowest at 300-p per share (as of 25 January). All five of the analysts surveyed by MarketBeat are rating Tesco a buy.
Meanwhile, algorithm-based predictions from Wallet Investor see the price of Tesco potentially rising to 302p per share this time nxt year and up £356p in the next five years.
Finally, the consensus price target among analysts surveyed by the Financial Times for Tesco stock stands at 321p with the highest estimate sitting at 350p and the lowest at 259p.
A total of 15 out of 21 analysts hold a buy or outperform rating on the stock while five rate the stock a hold and one an underperform.
Should I buy Tesco stock?
These are some of the reasons why you may consider to buy shares of Tesco:
Strong cash-flow generation capacity.
Robust balance sheet, manageable long-term debt, and relatively small near-term maturities.
Conservative valuation multiples.
Leading brand in the UK grocery space.
Room to grow if online sales continue to accelerate.
New management team bringing new ideas and approaches to the table.
Elevated and fairly stable dividend yield.
Should I sell Tesco shares?
These are some of the reasons why you may decide to sell Tesco shares:
An HGV driver shortage could disrupt the company’s logistics in the short term.
The grocery space is highly competitive in the United Kingdom and Tesco’s business model is threatened by the expansion of pure-play online grocery stores like Ocado and Amazon Fresh, as well as German discount retailers Aldi and Lidl. Tesco launched an ‘Aldi Price Match’ sticker promotion on key products in March 2020 that now covers 500 lines, and will hit its bottom line.
These pros and cons are important aspects of the business that investors should consider before deciding whether or not to buy or sell Tesco shares. They should not be considered direct advice. Investors should conduct their own research.
Big backers and holders of Tesco stock
Tesco stock is primarily backed by institutional investors. No individual holds a large percentage of the company’s equity while the following four institutional shareholders own almost 18% of the firm’s equity.
Short-sellers of Tesco stock
At the moment, Tesco’s short interest is less than 1% of the stock’s total float.
Tesco share price history
The price of Tesco stock had been diving since 2006 as the company’s competitive position progressively eroded. Back in 2010-2011, Tesco’s market share in the country was roughly 31%, meaning that the company has lost around 4% of the market to competitors since then.
Meanwhile, the industry as a whole has become more fragmented amid the appearance of specialised grocery stores and online competitors such as Ocado, and that has also hurt Tesco’s results.
However, the price of Tesco stock found a bottom in January 2016 at around 137p per share and has progressively recovered since then until reaching its current level of 258p per share.
At this point, the stock price is approaching a crucial multi-year resistance at 270p per share and a rejection at this level could result in a sizable correction for Tesco stock.
That said, the price action has been steadily climbing upon posting multiple consecutive higher lows in the past five years at least, and that increases the odds that this ceiling might be finally broken.
Moving forward, a break above this 270p threshold could lead to a full-blown trend reversal for Tesco. The positive catalysts that could prompt this include a prolonged post-pandemic tailwind for the firm’s online channel and the continuous improvement of Tesco’s bottom-line profitability following the target set by the management in 2018.
On the other hand, the current driver’s shortage could weigh on the short-term and mid-term outlook for Tesco stock as the company might experience disruptions in its distribution network and fuel sales that would have a material effect on its top-line results.
Biggest swings in Tesco’s share price
In the past 12 months, these have been the largest price swings Tesco stock has experienced.
Upswings
16 December 2020 – up 3.49%.
24 December 2020 – up 2.96%.
6 January 2021 – up 2.94%.
16 April 2021 – up 3.3%.
5 July 2021 – up 3.07%.
Downticks
15 October 2020 – down 2.98%.
11 December 2020 – down 2.95%.
21 December 2020 – 2.82%.
20 April 2021 – down 3.2%.
18 June 2021 – down 4.07%.
Tesco: company overview
Founded in 1919 by Jack Cohen, Tesco is one of the oldest and largest supermarket chains in the United Kingdom, currently owning and operating a total of 63.6 million sq ft of store space including its Tesco, One Stop, Booker, Jack’s, and other brands along with 379,000 sq ft operated by franchises.
To date, the company has a presence in five different countries across Europe including the UK, Ireland, the Czech Republic, Slovakia and Hungary, while the business employs approximately 360,000 people to carry out its massive day-to-day operations.
Aside from operating grocery, retail and discount stores, Tesco also owns a banking subsidiary called the Tesco Bank. Last year, the company produced £53.4bn in sales including £735m in revenue from the bank.
Just over 90% of the group’s top-line results come from the United Kingdom and Tesco also has interests in fuel distribution. This latter activity generated sales of £4.44bn last year, accounting for around 8.3% of the company’s total revenues.
Edited by Alexandra Pankratyeva
FAQ
Should I buy Tesco shares?
The decision of whether or not to buy Tesco shares should only be made after performing a thorough analysis of the firm’s price action and fundamentals. The opinions expressed in this article should only be used to complement the investor’s own due diligence and should not be considered a recommendation to buy or sell Tesco shares.
Are Tesco shares a good buy?
Tesco is the indisputable leader of the grocery store industry in the United Kingdom. The company qualifies as a decent value or dividend pick based on the following criteria:
Growth opportunities (digital channels).
Attractive dividend yield.
Experienced management team.
Conservative valuation metrics.
Manageable debt.
Still, markets are volatile and analysts’ predictions can go wrong. We encourage our traders to perform a thorough fundamental and technical analysis before making a decision to trade any asset, including Tesco stock.
Will Tesco’s share price go up?
It is impossible to predict with 100% accuracy how the price of a financial instrument will behave in the future. As of 7 December 2021, an algorithm-based prediction from Wallet Investor sees the price of Tesco rising by 17% over the next five years based on an assessment of the current trend. The consensus opinion from analysts surveyed by both the Financial Times and MarketBeat is that Tesco shares are a buy.
However, investors should not make a decision on whether or not to invest in Tesco stock based solely on these opinions. Any stock price predictions can go wrong, as the market is volatile and an asset can always move against your position.
Note that trading is risky and you should conduct your own due diligence before making a decision to trade Tesco or any other stock. Always remember your decision to trade depends on your attitude to risk, your expertise in this market, the spread of your investment portfolio and how comfortable you feel about losing money. Never invest more than you can afford to lose.
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