Is Tesco’s share price a buy ahead of half-year earnings?

British retail chain Tesco [TSCO.L] is looking in tip-top shape ahead of its half-year earnings report, due 2 October, with the share price having gained by more than 25.8% this year, and 5% since its last earnings report on 13 June.

In this Q1 trading statement, Tesco reported a 0.2% like-for-like sales change to just short of £14bn for the group and a 0.4% increase in UK and Ireland like-for-like sales, despite what it called “subdued” trading across the market.

In the 13 weeks to 25 May, the company said its UK business outperformed in both sales and volume by 0.2% and 1.3% respectively. “Tesco's pleased with its progress and we can understand why. It looks well set to hit its target of a 3.5-4% operating margin by 2020,” said George Salmon, writing for Hargreaves Lansdown in June. 

However, although the chain outperformed the UK grocery Market, share prices at Tesco dipped 1.5% on the news, and the company is “by no means in the clear,” according to Salmon.

“Aldi and Lidl remain a threat and Walmart is willing to offload Asda,” he states. “A sale, whether to private equity or an existing rival, could mean the brand gets new life breathed into it - and that could raise the prospect of another price war.”

“Tesco's pleased with its progress and we can understand why. It looks well set to hit its target of a 3.5-4% operating margin by 2020” - Hargreaves Lansdown writer George Salmon

What to expect for interim results?

Some analysts have stated they expect Tesco’s operating profit to rise to as much as £1.3bn for the group, and to £999 for the UK and Ireland despite challenging trade conditions over the past few months, according to BusinessLive.

Further to this, Tesco has outperformed market estimates for revenue and for earnings in four of its last eight results, and reported a 7.3% sales increase in its China, India and Malaysia stores in Q2 2019, according to the Motley Fool. City analysts forecast earnings per share as more than 17% ahead of last year, despite predicting revenues to remain flat at just over £31.7bn, Motley Fool states.

But there are headwinds for the supermarket group. As previously noted, cheaper entrants Lidl and Aldi are likely the biggest concern for most analysts and traders. For the 12 weeks to 9 September, Tesco’s market share fell from 27.4% to 26.9%, according to the Motley Fool, while Aldi’s market share increased from 7.6% to 8.1%, and Lidl’s increased from 5.5% to 6%.

Tesco share price vitals, Yahoo Finance, 01 October 2019

Aldi’s announcement last week that it is looking to open a new store in the UK every week, on average for two years, suggests that Tesco may have something to worry about after all. Meanwhile, Lidl has said it is looking to open 40 new stores in the next few years, adding to Tesco’s woes.

Furthermore, the threat of a no-deal Brexit is still a worry for Tesco and all of its competitors as a sudden exit could cause a drop in sterling, push up the price of imported goods, and hit consumer spending.

Positive consensus

Despite these challenges, analysts remain optimistic on Tesco stock. In the last week, Bernstein reaffirmed their outperform rating on shares of Tesco, while Investec raised its target price from 255p per share to 270p, according to ShareCast.

Meanwhile, Deutsche Bank reiterated its buy rating on the stock and raised its price target to 295p per share, which would represent a potential 21.7% upside on the current share price.

Of 14 analysts looking at Tesco 11 currently recommend buy, one put the stock as overweight, while two recommend hold and one puts the stock underweight, MarketWatch analysis showed.