Using 1990 as our base year, we have calculated that Tesco is historically undervalued at a share price of 371.1 pence, yielding 3.91%. Tesco is historically overvalued when the share price hits 704 pence, yielding at 2.06%.
As long as Tesco’s share price remains within 10% of its historically undervalued share price, and, it shows that it has embarked upon an emerging rising trend, we regard the shares as undervalued warranting a purchase.
Tesco operates multiple retail formats in 14 different countries and ranks among the top three grocery retailers in the world with US’ Walmart and France’s Carrefour holding top slots.
Tesco is the leading food retailer in the United Kingdom, where it operates about 2,500 of its nearly 4,900 stores world-wide. It holds more than 30% share of the UK grocery market. Substantially more than Walmart, in its home market. Tesco has also expanded into the non-food market through hypermarkets and online operations.
In comparison to its home grown competitors such as Sainsbury, Morrison, M&S and Waitrose, all with no or hardly any activities abroad, Tesco is becoming an increasingly international business. Tesco’s non-UK sales recently surpassed one-third of total group revenues for the first time. The group has a large presence in many Eastern European countries and parts of Asia.
Tesco entered the US market in late 2006. Opening its first store in 2007 coinciding with the opening of an 88-acre distribution centre, at a cost of about £93m capable of supplying about 400 stores. Tesco currently has 155 stores in southern and central California, Arizona and Nevada and gas announced to extend its Fresh & Easy store chain into smaller locations in California in order to better utilise its large upfront distribution centre investment.
In particular Tesco’s already vast operation throughout Asia Pacific is starting to deliver significant profits for the group despite China not yet breaking even. Former international head Philip Clarke replaces Sir Terry Leahy in March, and he will no doubt be looking to the rapid economic growth and favourable demographic trends in the Far East.
Despite successes on the international front, Tesco still generates more than half of its overall sales and around 80% of its retail operating profits in the UK. In the current economic environment in the UK it faces continued difficulty and uncertainty. The company had been losing market share to both price discounters such as Aldi and Lidl as well as peers like Asda (owned by WalMart) and Wm Morrison Plc.
Food cost inflation and the increase in the value-added tax should weigh on near-term results in the UK, while saturation and pressures from regulators may limit UK growth over the longer term, despite gains from other businesses like Tesco Direct and Tesco Bank.
Since growth at home will probably be strained for some time, Tesco’s future will be defined by its ongoing global expansion.
International operations provide already more than half of its growth, and the group has invested heavily in recent years, using internal funds, new debt, and property sales/leasebacks to boost capital expenditure.
Globally, competition is intense in foreign markets from domestic local chains and other large international retailers such as Wal-Mart and Carrefour.