The Tesco share price jumps! Is it too late to buy?

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The Tesco (LSE: TSCO) share price has put in a stunning performance over the past few weeks. Since the beginning of June, shares in the company have returned around 15%.

Following this performance, shares in the supermarket retailer have produced a total return of 12.4% over the past 12 months.

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Tesco share price interest

It looks as if shares in the retailer have pushed higher recently as its peers attracted interest from private equity companies. Morrisons is in the process of being bought out by a consortium of private equity firms, while there’s been speculation Sainsbury’s will succumb to the same fate. But, as of yet, no offer has emerged.

Tesco has yet to be mentioned as a potential buyout target. But that doesn’t mean the company’s immune to a takeover. The group’s portfolio of freehold property and the potential to generate over £1bn a year in free cash flow could be desirable qualities for any buyer.

I think this is the main reason why the Tesco share price has been pushing higher recently. The company may not be the subject of a bid just yet, but the stock’s looked cheap for some time. It appears as if the market is finally starting to realise this business could be undervalued. It seems to be re-evaluating the stock’s prospects as a result.

I believe this trend could continue. At the time of writing, the retailer is selling at a forward price-to-earnings (P/E) multiple of 13.4. Even though its valuation has increased in recent weeks, it’s still below the five-year average of 16. Further, the stock offers a dividend yield of just under 4%. I think that looks attractive in the current interest rate environment.

Management has also hinted at the prospect of additional dividends and share repurchases as the company continues to generate high levels of free cash flow.

I think the Tesco share price continues to look cheap, despite its recent performance. As such, I’d buy the stock for my portfolio today.

Growth headwinds

However, I’m aware the business faces several headwinds, which could impact growth as we advance. These include rising costs for staffing and transport, which could hurt the firm’s slim profit margins and reduce cash flow.

Rising food costs could also lead to reduced customer spending. This would impact overall sales growth. And finally, competition in the UK grocery sector is fierce and only growing. This limits the company’s ability to raise prices if costs do rise.

Even after taking these risks into account, I think the Tesco share price looks attractive. While it seems unlikely an offer will emerge for the whole company, as the UK’s largest supermarket retailer, the group has an unrivalled position in the market. It can leverage this competitive advantage to enhance growth going forward.

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The Tesco (LSE: TSCO) share price has risen by around 4% in the last five days at the time I’m writing. With other major supermarket chains such as Morrisons seeing exponential rises this past month, could Tesco also follow suit moving into September?

This year has produced a lot of difficulty for Britain’s largest retailer. Moving into the second half of 2021, is it possible for Tesco to finish strongly or will its lacklustre performance only continue? Here I examine whether or not Tesco shares are a strong buy for me.

The bullish case for the Tesco share price

It’s important to remember that Tesco is still the UK’s biggest retailer. So when a company of this size has an underperforming share price, there is always the possibility that I can make a decent profit from its undervaluation.

Tesco has the experience and expertise to stay around for generations to come. When I’m thinking of a major long-term investment, choosing a company that has become part and parcel of the marketplace is a sign of sustainability and security in investment for me.

I feel that getting the basics right for an investment is essential. It would be unwise of me to disregard Tesco’s fundamental success over the past decade. This is based on the fact that its revenue has grown from £54bn in 2016 to £57bn in 2020.

Tesco has also come out strong in its FY21 report. Group sales were up by 7.1% to £53.4bn, retail cash flow rose by 29.8%, net debt dropped by 2.8%, and the dividend per share remained unchanged at 9.15p. This was also bolstered by its more recent Q1 report with like-for-like sales growing by 9.3%. Overall, the company is continuing to perform well in uncertain conditions. So why is the share price underperforming?

Bearish factors for the Tesco share price

Although Tesco is still the largest supermarket chain in the country, competition is rising. Morrisons, as mentioned before, is seemingly upping its game with the completion of its momentous takeover by Clayton, Dubilier and Rice (CD&R). The Sainsbury and Marks and Spencer shares are also performing better than Tesco. The drop in the Tesco share price could simply be a result of its competitors’ share prices rising.

Tesco is also fearful of another shortage in the supply chain heading into Christmas. However, a shortage of drivers, in part caused by Brexit, should affect the majority of supermarket chains and not just Tesco.

Should I buy for September?

I’m uncertain on what the future holds for Tesco in the near future. I think it is very possible that the Tesco share price could face more problems moving into September. My reasoning is based on the shroud of mist regarding how Tesco has performed now restrictions have been lifted. On this basis I think the next financial report could be quite telling for what direction it will go in.

So, for now I will hold off buying Tesco shares, although I do believe that in the long-term the UK’s biggest retailer would be a profitable investment for me.

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Tesco Share Price

The Tesco share price (LON:TSCO), up by 0.79% on Friday, is set to close out its fourth consecutive week in the green. The supermarket chain has now added 8.79% in the past month. However, it remains some way off its level in February, when Tesco paid out £5bn to shareholders via a special dividend with the proceeds of the sale of its business arms in Malaysia and Thailand. On 12 February, the Tesco share price was at 304.76p, while today it stands at 255p per share. With close attention being paid to UK supermarkets by American private equity firms, investors will be keeping a close eye on the Tesco share price.

Takeover Talk

The Morrisons buyout has brought eyes to the sector, with both Tesco and Sainsbury’s seeing their stock values rise in recent weeks. However, while US private equity firms are keen on Morrisons, Tesco is a different proposition entirely. Over the past two years, Morrisons has been underperforming vs Tesco, meaning it represents better value for Clayton, Dubilier & Rice et al.

Analysts

A range of analysts, as reported by Stockopedia, have a positive outlook on the FTSE 100 company. Among seven analysts currently covering Tesco, seven have given a ‘buy’ recommendation, three a ‘hold’ and zero a ‘sell’. This may come as encouraging news to those holding the stock, although it must be noted that analysts are susceptible to fallibility just like investors.

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