The Tesco share price looks dirt-cheap! Here’s what I’d do now

The Tesco (LSE: TSCO) share price has put in a mixed performance over the past 12 months. Including dividends, and after adjusting for the share consolidation, it has lost 7.4% over the past 12 months, compared to a return of +0.6% for the FTSE 100 over the same period. This performance has come even though the business reported strong sales growth in 2020, thanks, in part, to the pandemic. 

Following the company’s mixed share price performance and impressive sales achievement over the past 12 months, the stock now looks cheap. 

As a result, I’ve been looking at the Tesco share price to see if it could be worth adding this retailer to my investment portfolio. 

Growth ahead

Like all companies, 2020 was an unprecedented year for Tesco. With many other retailers forced to close, the supermarket giant reported a significant increase in sales for the year.

Some of this benefit was offset by higher costs due to coronavirus regulations, such as the cost of installing screens and cleaning stations and stores.

Nevertheless, during the first half of the company’s 2020/21 financial year, pre-tax profit increased by nearly 29%. It appears this trend continued during the second half of the year. For the 21 weeks to 9 January, sales increased around 7% on a like-for-like basis. 

Overall, City analysts expect the retailer to report a net profit of £947m for its current 2021 financial year. That could increase to £1.5bn in 2022. Based on these projections, shares in the company are trading at a forward multiple to earnings (P/E) of just 10.4. 

Of course, these are just projections. There’s no guarantee the company will meet these profit forecasts. Therefore, they shouldn’t be relied on for investment decisions. 

Still, they do provide some indication as to how cheap the Tesco share price is today. Historically, the stock has commanded a P/E multiple in the mid-teens. Meanwhile, the rest of the supermarket sector is dealing at a P/E of 12.4, and the broader market is selling at a forward earnings multiple of more than 15. 

These numbers imply the stock is undervalued. City analysts are also projecting a dividend yield of 5% next year. Once again, this is only a projection at this point. 

Tesco share price risks 

As the country’s largest retailer, Tesco has plenty of strengths and opportunities. Unfortunately, there are also plenty of threats to the company’s business model. Threats such as higher costs, which had an impact on its bottom line last year. An increase in the minimum wage may also have a bearing on the business. Then there are potential tax increases to consider. This would reduce net income and the amount of cash available to be returned to investors. All of these are factors that could increase costs and put the dividend at risk. 

These challenges may put some investors off buying the Tesco share price. However, I’m comfortable with the level of risk involved in investing here. As such, I’d buy the stock for my portfolio today.

I think Tesco’s defensive nature, combined with a company’s growth potential, is incredibly attractive, although I intend to keep a close eye on the risks the business faces going forward.