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Tesco share price: can it keep rising?

Shares in supermarket giant Tesco (LSE: TSCO) have risen 30% from the 190p low seen at the end of last year. The FTSE 100 firms share price has continued to climb following last weeks full-year results. Ive been taking a fresh look at the stock. Should shareholders expect further gains, or is the firms recovery now complete?

A new look

Five years ago, Tesco was bloated, laden with debt, and hated by many of its suppliers. Chief executive Dave Lewis has changed all of this. Hes cut 1.3bn of costs, improved the firms business practices, and ditched some of its overseas operations.

To help fuel long-term growth hes acquired fast-growing wholesaler Booker and set up a partnership with French supermarket group Carrefour. Debt levels have tumbled and the groups profit margins and cash generation have improved sharply.

Lewis says that the firm has now met most of its turnaround goals. Hes very confident that we will complete the journey in 2019/20.

Two new opportunities

My colleague Kevin Godbold believes Tescos growth may slow as its turnaround completes. Im not so sure. Last weeks results suggested to me there are at least two routes open to boost profits and shareholder returns.

A recent report in The Sunday Times suggested the company is working on a loyalty scheme similar to Amazon Prime. Tesco hasnt denied this. The suggestion is that the firms Clubcard offering could be expanded to tempt shoppers to sign up to the groups banking and mobile phone services. I think this could be big.

The second opportunity is for the firm to increase shareholder returns. Tescos strong cash generation and low debt levels suggest to me it may soon be able to return spare cash to shareholders through share buybacks or special dividends.

In my view, the outlook remains positive. Trading on 14.5 times 2020 forecast earnings with a 3% dividend yield, I view Tesco stock as fairly priced. I remain a long-term buyer.

Dull but profitable?

Like Tesco, small-cap Carrs Group (LSE: CARR) operates a fairly dull business in a mature sector of the market. This 140m group has two divisions, agricultural supplies and engineering, with a focus on remote handling equipment for the energy industry.

Carrs doesnt attract much attention, but the firms shares have risen by more than 300% over the last 10 years. By contrast, Tesco stock is still worth 25% less than it was 10 years ago.

I see Carrs as a stock you could safely buy and forget for another decade. The firms half-year results, published today, confirm that view. Adjusted pre-tax profit rose by 4.5% to 11.4m during the six months to 2 March and the interim dividend will rise by 4.7% to 1.125p per share.

Although demand for agricultural feed was lower than usual due to the warm winter, the groups engineering division turned in a strong performance with significant improvement in UK manufacturing and a major USA $8.5m contract win for a remote handling customer.

Carrs shares have dipped slightly today and currently trade on 10.5 times forecast earnings, with a 3.2% dividend yield. The group has stable profits and a strong balance sheet. I see this as the kind of boring stock that could help you retire early.

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Femi Ogunshakin Managing Director
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