Tesco (LSE: TSCO)has come a long, long way since the profit warnings and tumult thatled chief executive Philip Clarke to lose his job. Dave Lewis has shown his mettle, and is guiding theretail chain through the current storm.
An impressive recovery
I think you can describe the new strategy in one word: fun. For the first time for what seems like years, I really enjoy shopping at Tesco.
The shops are smarter and more attractive, there are pictures on the wall andthe produce is displayed perfectly. After you have done your shopping, you can have a coffee at Harris & Hoole or lunch at Giraffe. When you check through your till receipt, you realise that the produce you bought was as cheap as it has ever been. And when you arrive home, you find that the strawberries you bought are delicious. Whats not to like?
The Tesco of today is doing what it does best: taking care of the details.
And yet, heres the thing. I still wouldnt buy shares in Tesco.
Why? Well, I think this is a great company, butit is in the middle of asupermarket sector thatis ferociously competitive. With the discounters on the one side, and the premium retailers on the other, it is the customers who hold the whip hand. The sector has too much capacity, and this has meant that profitability has tumbled.
But this story has some way to run
Analyse the numbers and you will see exactly what I mean. At its current price of 213p, the business is on a2015 P/E ratio of 19. Sounds reasonable? Well, consensus predicts a P/E ratio of 30 in 2016, and 23 in 2017. Whats more, the dividend yield is expected to fall from the current 5.2% to 2.7% and then 1.2%.
Yet the turnover of this retailer has hardly budged. This is clearlya story of over-capacity and rampant competition.
However, as we look to the future, the company can draw on many positives. I think Tesco will be one of the long-term winners in the supermarket sector, because it provides the best overall combination of value, quality and experience. And I think it should not give up on its overseas businesses, because this provides a great opportunity for growth.
But, over the short to medium term, Ibelieve we are still in the midst of a shake-out which has some way left to run. And Ithink Tesco shares could fall further. Tesco is on my watchlist, but it is still way too early to buy.
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Prabhat Sakya has no position in any shares mentioned. 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.