Look at a share price chart of Tesco (LSE: TSCO) from the 1980s to today, and youll seeavaluation thattrends higher from year to year, reaching a peak around 2007, but which then falls lower and lower post-Credit Crunch.
Tesco is back to where it was 19 years ago
Tescos share price has now fallen to just 158p.Its now back towhere it was in 1997, some19 years ago. This really is the rise and fall of Tesco, and it will take something fairly dramatic to break this trend.
Tesco bears will note, with a wry smile,that 1997 was the year that Sir Terry Leahy was appointed chief executive of the retail giant. And it was under his stewardship that Tesco expanded rapidly both in the UK and overseas. The Tesco of the 1990semployed far fewer people, in far fewer stores. Yet all those hard-earned share price gains seemed to have been wiped out.
Dig a little deeper and we can see why. What determines a companys net value? Well, its not sales, nor turnover, nor number of people employed. A businesss share price is determined by its current and future earnings.
Tescos sales are far higher than they were 20years ago it is, quite simply, a far bigger company than it used to be. But, instead of profits growing with sales, theyve actually fallen. This is because theresmuch greater competition in the UK grocery market than there has ever been before. With increased pressure in the premium sector fromWaitrose and Marks & Spencer, and also in the budget sector fromAldi and Lidl, Tesco is finding itself squeezed from both sides.
Its still too early to buy back in
Thats why, although I very much welcome the recent uptick in sales from Britains leading retailer, I would like to see more evidence of a revival before I invest. What I, and every fund manager and city analyst, will be keeping an eye on is not sales, but earnings. If the increase in sales has been at the expense of profitability then I would remain bearish on Tesco. But ifDave Lewis has pulled the proverbial rabbit out of the hat and increased both profits and sales, then it would be time to buy back in but I think this is unlikely.
Im a regular shopper at Tesco, and I still think it offers the UK public the best combination of quality and value. But Im less enamoured of Tescos charms as a potential investment.
In todays low cost, China-centric world, competition in the Britishsupermarketsector is fiercer than it has ever been. Ina market where even heavyweights like Tesco are having to run to stand still, investors would do best to watch from the sidelines with interest, but stand well clear.
It’s not often that you find a fast-growing sharethat’sboth consistent, and has momentum. Yet our experts at the Fool have unearthed exactly that.
It’s a well-known company with a strong track record and an impressive growth rate. And we at the Fool think it would make a tidy addition to your portfolio.
Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.