Tesco Share Price is Cheap by At Least 36%. Is it a Buy?

The Tesco share price has been in a strong bullish trend recently. The stock rose to a high of 245p, which is about 12% above the lowest level in March. This brings the total market cap of the British retailer to more than 18.6 billion pounds. 

Tesco underperformance

Fundamentally, Tesco has done relatively well in the past few years. Following its accounting scandal almost a decade ago, the firm has performed well. Its revenue has risen from more than 54 billion pounds in 2016 to more than 57 billion pounds in 2020. 

At the same time, it is a highly profitable company that generates more than 700 million in annual profits. The company has also done some important strategic decisions. For example, it has boosted its e-commerce solutions and exited its loss-making European and Asian businesses. 

Still, the Tesco share price has lagged its peers. The chart below shows that the stock has underperformed that of Morrisons, Sainsbury’s, and Marks & Spencer. 

Tesco share price vs peers

This underperformance is mostly because investors are not seeing any catalysts for the company going forward. They see a slow dividend growth and no likelihood of acquisition. They also see further competition coming up from the likes of Amazon. 

As a result, Tesco remains a highly undervalued. As shown below, a Discounted Cash Flow (DCF) calculation by SimplyWallSt shows that the stock is undervalued by about 36%. 

Tesco DCF

Similarly, while Tesco has a higher dividend payout ratio of about 4%, its forward PE ratio is substantially lower than that of other firms. It has a forward PE of about 13 while retailers like Kroger and Walmart have a forward PE of more than 25.

Still, an undervalued company is not always an automatic buy. In fact, historically, overvalued stocks have done well than undervalued ones. Also, with no major catalysts ahead, the stock could remain being undervalued for a while.

Tesco share price forecast

The daily chart shows that the TSCO share price has been in a strong bullish trend recently. Before that, we see that the shares formed an ascending channel that is shown in black. It is currently along the upper side of this channel. It has also rise above the 25-day and 50-day EMA. 

Therefore, more upside to 250p will be confirmed if the stock manages to move above the upper side of this channel. On the flip side, a drop below 230p will invalidate this view.

Tesco share price