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Stock Watch

Does Tesco share price have further upside potential?

Tesco share price: An exterior shot of a Tesco supermarket

Tesco’s [TSCO.LSE] share price has risen by more than 10% since early July and, with the company set to announce its half-year results on Wednesday 6 October, could the supermarket giant be set to make further gains?

Will strong fundamentals boost Tesco’s share price? 

Supermarkets have hit the headlines in recent months – from the Morrisons takeover saga to supply chain issues, and the impact of the HGV driver shortage on deliveries to stores and petrol stations. This followed a period of cost increases, squeezing margins, as pandemic-related demand for home deliveries prompted chains to hire staff and expand their online businesses. 

Despite this adversity, Tesco has performed well. Online sales have driven Tesco’s growth over the past year, as home deliveries have doubled in capacity to 1.5m slots a week, boosting sales by 77%. In Q1, which covered March to May, demand remained high at 1.3m orders a week, contributing to two-year sales growth of 81.6%. Group like-for-like sales rose £13.36bn in Q1, with the UK operation accounting for £10bn of that number. 

But despite this strong performance, management were cautious about the rest of the year. Commenting on the Q1 results in June, chief executive Ken Murphy said he was “pleased with the strong start we’ve made to the year”, but added that “profit guidance from April remains unchanged” as “the market outlook remains uncertain”. This note of caution may have concerned some investors, as Tesco’s share price struggled to rally in the days following the announcement. However, the negativity was short-lived. Since early July, Tesco’s share price has risen by more than 10%, and there appears to be potential for further upside, with the shares currently 25% below January’s 52-week high at 317.55p.

Sales data bodes well for Tesco’s half-year results 

Although the latest Kantar figures show that retail food sales continued to fall in the 12 weeks to 5 September, partly due to the reopening of restaurants and bars, Tesco is somewhat shielded from this slowdown by Booker, its wholesale subsidiary, which supplies the hospitality sector, helping offset dips on the supermarket side of the business. In any case, Tesco and Waitrose bucked the industry trend, as each saw their sales numbers rise for the period, though Tesco sales grew by only 0.2%. 

Though slight, this market outperformance provides further evidence that Tesco is a well-run business, and that its share price may be undervalued. Indeed, the somewhat disappointing performance of Tesco’s share price in recent months has been a surprise, given takeover speculation across the supermarket sector. Tesco remains the largest retailer in the UK, supported by a nationwide distribution network, and its balance sheet indicates that it owns around £40bn of assets, compared to a current market capitalisation of around half that figure. 

Tesco’s half-year results could lend support to positive outlook  

As the UK moves ahead with its gradual post-covid reopening, it is likely that supermarkets will benefit from increased footfall. Looking further ahead, Tesco also stands to benefit from long-term trends, not least rising demand for food and drink as the UK’s population continues to grow. 

Given these near- and long-term factors, it will be interesting to see how the Tesco share price reacts after the company announces its half-year earnings at 7am on Wednesday 6 October. 

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