Are Tesco shares a good investment?

Tesco shares have risen more than 20% in the last 12 months as the retailer recovers from the 2022 correction. But can this upward trend continue?

Tesco Plc (LSE:TSCO) is an international grocery store chain. One of the company’s most compelling and profitable factors is its flexibility in operations. At least that’s what I think. This has allowed them to survive in the tough and competitive world of retail amidst names like Morrisons and J Sainsbury. Furthermore, the recent transition towards decarbonization has further eased its position in the investment community.

While the retail chain market remained as competitive as ever, let’s explore the investment viability of Tesco shares for my portfolio.

Key points

• Tesco works towards decarbonisation and makes home deliveries with 500 electric vans.
• Tesco has a market share in the UK of almost 27% in terms of sales.
• Analysts currently have a buy stance on Tesco shares.

What does Tesco do?

Tesco Plc is a British multinational grocery and general merchandise retailer with a network of more than 300,000 stores. The retail chain aims to offer customers affordable, healthy and sustainable food options.

The recent agreement with the UK media agency Omnicom Media Group It is expected to provide the retail chain with a commercial campaign connected to the full funnel with greater precision. And it could eventually generate more investment opportunities through a focused lens.

What do the finances look like?

In the year ending February 2023, the company achieved strong sales of £57.656 million, a change of 5.3% from the previous year. This equates to a UK market share of almost 27%. While this reflects a 0.4 basis point reduction on last year, it is still a healthy contribution to the overall UK retail industry.

Earnings per share of 21.85p, along with a dividend of 10.9p, reflect its continued investment in great value and quality for its customers and investors.

Net debt remained broadly stable year on year, with strong cash generation funding more than £1.6bn of returns to shareholders in the form of share buybacks and dividends. The retailer generated £2.133m of retail free cash flow, including a net working capital inflow of £468m. The £144m cash flow reduction is due to lower retail operating profits and higher levels of capital expenditure, offset by a reduction in cash tax.

The bullish case for the Tesco share price

Tesco shares are currently trading around 269p. From the beginning of 2023, this is a rough year-to-date appreciation of approximately 18%.

The company management is determined to offer its customers reliable, affordable yet healthy and sustainable food options. All of this is delivered along with quality and convenience. I believe this is one of the main factors that contributes to building a loyal customer base that contributes to long-term growth. Additionally, management’s dedication to providing value to customers makes it stand out in my mind.

The bearish case for the Tesco share price

Tesco’s business is likely to always be in demand. After all, people need to eat and drink. But rising inflation puts a lot of pressure on maintaining current and long-term growth. This, along with less generous changes to the Tesco Club Card policy, has put further pressure on future sales. No doubt, continued resilience has proven to be fruitful in terms of sales growth in 2023. However, the retail chain needs a good strategic plan in action soon.

Furthermore, the shift in consumer preferences from less sustainable products to more sustainable options requires an immediate reshaping of their product development and purchasing patterns. At least that’s what I think.

Tesco share price predictions

12-month price targets for Tesco shares have a mid-target of 302p, with a high estimate of 330p and a low estimate of 235p. Most analysts have a buy stance on the retail chain’s stock as they believe it will outperform in the coming months.

Forecasts must always be taken with caution. While they can be helpful in getting a rough idea of ​​what to expect, predictions are based on assumptions that may not hold true. And with the UK economy still recovering from turmoil, a new problem is possible that could overturn analysts’ expectations.

Should you buy Tesco shares today?

In my opinion, Tesco shares are certainly a reliable investment option. Despite the huge drop to the low of 200p in 2022, the stock has recovered remarkably so far today. And that’s not entirely surprising given that the company has a long history of going through periods of economic stress.

Additionally, the continued focus on improving customer experience and strategic changes within the company have allowed it to stand out in the industry. Therefore, although I don’t expect any spectacular growth, I think now is a good time to buy Tesco shares for my personal portfolio.

Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. The opinions expressed about the companies and assets mentioned in this article are those of the author and therefore may differ from the opinions of The Money Cog Premium Services analysts.