Its clear that since Sir Terry Leahy left Tesco (LSE: TSCO), things have gone very badly for the company and for its investors. Indeed, over the last year alone, Tescos share price has fallen by an incredible 39% and is now trading at an 11-year low. However, now could prove to be the perfect time to buy a slice of a company and, furthermore, its share price could double. Heres why.
A New Strategy
Clearly, new CEO Dave Lewis is going to adopt a different strategy compared to his predecessor, Philip Clarke. Indeed, there are a number of different viewpoints as to what he should do. The most obvious changes that could improve the bottom line include making Tesco smaller through shutting less profitable stores, embarking on an international expansion that was championed by Sir Terry Leahy and scaled back under Philip Clarke, as well as splitting the Tesco brand between higher price-point and discount products, so as to become more of a niche player. All are sound ideas and could help to push the companys bottom line upwards. In turn, this could have a positive impact on Tescos share price over the medium to long term.
As well as a shift in strategy having the potential to increase Tescos share price (via increased earnings), now could be a good time to buy because investor sentiment is at a low ebb. The market appears to be expecting indefinite bad news from Tesco and anything remotely positive could be hugely welcomed (and rewarded) by the market in terms of a higher share price. For instance, if Tescos like-for-like sales figures show an improvement moving forward, or if its market share declines ease up, the market may begin to question whether the companys low valuation is really warranted.
Indeed, Tescos performance as a business has been weak in recent years. As a result, its year-on-year figures (such as like-for-like sales figures) have been very poor. This means that future numbers need only be mildly positive in order to beat the previous years figure. So, even if things dont get a whole lot better for Tesco over the short term, as long as they dont get much worse then it could be viewed as an improvement by investors. In turn, this could mean stronger sentiment and a higher share price.
Clearly, Tescos share price is low for good reason: the company has not performed well in recent years. However, a new management team and a new strategy has the potential to turn around the companys performance. Indeed, with sentiment being so weak, even arresting the companys decline could be handsomely rewarded via a higher share price and this could be a very realistic achievement since Tescos comparative numbers are poor.
Together, these factors could be enough to return Tescos share price to its 2010 level of 450p. Back then, Tesco delivered earnings per share (EPS) of 31.8p and traded on a price to earnings (P/E) ratio of 14.2. Today, its EPS is expected to be 24.2p and it trades on a P/E of just 9.3. A mixture of increasing profitability and improved sentiment could send it back there over the medium to long term.
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Peter Stephens owns shares of Tesco. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.