Tesco share price has staged a strong recovery recently as the market reflects on the improving macro conditions in the UK. It has also rebounded after the company published mixed quarterly results in October. It was trading at 228p on Friday, which was about 17.50% above the lowest level in October. In all, the stock has dropped by 20% this year and outperformed the SPDR Retail ETF (XRT), which has fallen by 25%.
Classic value stock
Tesco Group is the biggest British retailer. It operates four main businesses in the UK. Its main one is Tesco supermarket, which owns thousands of shops in the country. This division is responsible fo over 70% of all its revenue. Tesco also operates Booker, the biggest wholesale company in the country.
Another business is Tesco Bank, which provides retail banking to customers. It is a small part of Tesco’s business. Finally, Tesco owns a grocery business at the Republic of Ireland (ROI) that also contributes marginally to its total earnings.
Tesco’s business has been going through a difficult period this year. Elevated inflation has led to poor sales growth while the falling British pound has made it expensive to operate. In this period, the company’s cost of doing business has also risen sharply in the past few months.
The most recent results showed that Tesco’s sales for the first half of 22/23 year rose to £28.1 billion. Most of its segments saw a revenue decline as its operating profit dropped to £736 million. Retail free cash flow dropped to £1.23 billion while its dividend rose by 20% to 3.85p. This means that Tesco offers a 5.62% dividend yield.
Tesco is operating in a difficult market environment. The biggest challenge is the ongoing competition with companies like Lidl and Aldi, which have gained market share recently. However, Tesco’s market share has done better than its peers like Asda, Sainsbury’s and Morrisons. It has done that because of its economies of scale and its Aldi price match guarantee.
Therefore, Tesco can be a good investment for dividend and value investors who are not bearish on the UK. As I wrote earlier, Tesco is also highly undervalued.
Tesco share price forecast
The daily chart shows that the TSCO share price has made a strong recovery in the past few weeks. In this period, it has managed to move above the 23.6% Fibonacci Retracement level. The 25-day and 50-day moving averages are close to making a bullish crossover pattern. At the same time, the Stochastic Oscillator moved above the overbought level.
Therefore, the stock will likely continue rising as buyers target the 50% retracement level at 250p. A drop below the support at 220p will invalidate the bullish view.
