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Are Tesco (LSE: TSCO) shares cheap?
Billionaire investor Warren Buffett once said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.“
I rate Tesco as a great company for long-term investors, and I think the share price is more than fair right now. So yes, that makes Tesco cheap by my standards.
The shares rise
Tesco shares inched up a couple of percent on 4 October, in response to the retail giant’s first-half results. It makes me wonder how long they might remain good value.
The price has gained this year, but it’s moved sideways over five years.
Safety
Still, Tesco shares held up pretty well in the 2020 crash, particularly compared to the big pandemic losers.
And that says one key thing to me.
The stock is resilient. And that’s surely down to the essential nature of the business, and the firm’s leading position in its sector.
New crash?
Will there be a new stock market crash soon? I don’t think so. Not when FTSE 100 shares are on low valuations, and analysts predict earnings and dividend rises.
But we might see a wobble if US markets fall, and I think there’s a fair chance of that.
So, I’d put Tesco on my list of stocks that could be good to soften the pain of any possible downturn.
But how did the half go, and what does the future look like?
First half
Chief executive Ken Murphy focused on cutting prices and helping customers. He said: “We are committed to doing everything we can to drive down food bills and Tesco is now consistently the cheapest full-line grocer.“
I wonder why he stressed that, rather than Tesco’s profits, which climbed in the period?
On a statutory basis, operating profit doubled to £1.48bn. Tesco reckoned it’s up a more modest 14% in adjusted terms, with the adjustments made to last year’s figures.
Adjusted earnings per share rose by 16.8%, to 12.26p. And the company kept the interim dividend at 3.85p per share.
Good enough
For shareholders, I think that’s a pretty fair result.
Seeing profits rise when inflation is high has to be good. Then again, some wholesale prices are falling, and that should improve margins in the short term.
For the full year, Tesco now expects £2.6bn to £2.7bn in retail adjusted operating profit, and retail free cash flow of £1.8bn to £2bn.
Oh, and a “relentless focus on customers” remains a key part of its strategy.
The verdict?
These numbers are better than I’d hoped. We’re looking at a forecast price-to-earnings (P/E) ratio of under 12 for the full year, with the dividend yield at 4.1%. That looks cheap enough.
Tesco is still very much dependent on how inflation goes in the near future. And margins could be squeezed again in the second half.
So, there’s still plenty of uncertainty, and I don’t expect any big share price moves for a while. But I do rate Tesco as one of the FTSE 100’s best safety stocks for long-term investors to consider.
