Tesco(LSE: TSCO) is probably one of the markets most conversational stocks. You either love it or hate it. And depending on who you talk to, the company is either cheap or expensive.
But whats the real story? After rising 23% year to date, is the company now overpriced or is it still undervalued?
With so many different opinions around, the best way to try and place a value on Tescos shares is to use a number of different metrics. And the three Ive chosen are as follows:
- The enterprise value/earnings before interest, tax, depreciation, and amortization or EV/EBITDA figure;
- The PEG ratio;
- Sum-of-the parts valuation.
Starting at number one. Tesco currently trades at a 2016 EV/EBITDAmultiple of 8.9, around the same as its five-year average. But the companys larger international peers,Wal-Martand Carrefourin particular, currently trade at EV/EBITDA multiples of 8.2 and 8.3 respectively.
With this being the case, Tesco does look to be slightly overvalued on an EV/EBITDA basis.
Tescos earnings are expected to expand by 5% this year, which puts the company on a PEG ratio of 5.3. Not exactly cheap.
However, the groups earnings are set to grow by 26% during 2016. On that basis, Tesco is trading at a 2016 PEG ratio of 0.7 and looks cheap compared to its projected growth for 2016.
Sum of the parts
A sum of the parts valuation is probably the best way to value Tesco, as the company is an asset-rich business.
Indeed, Tesco Bank, Tesco Ireland, Tescos European business, Tesco Asia, data processor Dunnhumby, Dobbies garden centres, One-Stop Giraffe restaurants and Tescos stake in the Harris+Hoole coffee shop business are all part of the Tesco empire.
That said, its difficult to try and place an accurate value on all of these individualparts. Nevertheless, we know that an offer of 8bn to 10bn has been made for Tescos Asian arm, and its believed that Dunnhumby is worth around 2bn.
However, Tescos debt pile, including its pension deficit and lease commitments, stands at just under 22bn. Then theres the value of Tescos property to add back in. Even after taking a 6.4bn property write-down last month, the value of the property on Tescos balance sheet still amounts to 20bn.
So, the sum of Tescos property, the groups Asian business and Dunnhumby amounts to 32bn. Strip out debt and the figure falls to 10bn.
Tescos market capitalisation currently stands at 19bn, which means that the market is valuing Tescos UK business, Tesco Bank and all the other parts of the Tesco group at just 9bn. Thats just too cheap.
All in all, Tesco still looks cheap on two out of my three metrics.However, one thing the company no longer offers is an attractive dividend yield.
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