Tesco (LON: TSCO) share price has moved sideways in the past few weeks as the recent spectacular rally takes a breather. After peaking at 370p in September, the stock has retreated slightly to 360p.
UK economy is doing well
Tesco, the biggest retail group in the UK, is often seen as a barometer for the country’s economy.
It has over 4,800 stores in the UK, which are made up of Tesco Express, Tesco Metro, and Tesco Superstores.
The company also owns Booker Group, which it acquired in 2018 for £3.7 billion. Booker has frown to become one of the largest wholesale group in the UK, supplying products to thousands of smaller independent retailers.
Tesco is an all-weather company that does well in all conditions because it is often seen as a cheaper alternative to other retailers. A good example of this is what happened during the Covid-19 pandemic, when its revenue jumped because of its large assortment of products, e-commerce growth, and affordability.
Financial results show that Tesco’s business had over £63.9 billion in annual revenues in 2019 followed by £64.76 billion in 2020. Its UK revenue rose in 2021, while its comprehensive figure fell to £57.90 billion in 2021 after the company sold its Asian business.
Tesco does well when the economy is not doing well because it is widely seen as one of the cheapest retailers in the country. It has also introduced a price match, which makes it as competitive as other discount companies like Aldi.
The last financial results showed that its annual revenue soared to £66 billion, meaning that the company’s business was still doing well. Tesco has also continued to take market share in the retail sector.
Therefore, the company will likely continue doing well after the Office of National Statistics (ONS) published encouraging economic data. The economy expanded by 0.2% on a MoM basis in August, which translated to a 1% increase from the same period last year.
UK’s industrial production rose by 0.5% while the trade deficit narrowed to £15.5 billion during the month.
These numbers mean that the economy was doing well in August, which could translate to more demand for Tesco.
On top of this, the company will likely benefit from the ongoing monetary policy easing by the Bank of England (BoE). It has already slashed interest rates by 0.25%, and officials have hinted that the trend will continue in the near term.
Read more: Tesco share price sits at a record high; but is it a good value?
Tesco earnings are doing well
Tesco published strong half-year results last week. According to the management, its groupsales rose by 3.5% in the first half to £31.4 billion. The change at constant rate was 4%, which is impressive for a local retailer
The statement also showed that its operating profit rose by 13% to £1.6 billion, while its profit before tax (PBT) jumped by 19.9% to £1.3 billion.
Tesco has also made progress in other areas. Clubcard growth has continued, with almost 5 million members receiving Clubcard Challenges. It is also growing its advertising business.
Most importantly, Tesco has been rewarding its shareholders. It has a dividend yield of 3.35%, higher than most companies in the FTSE 100 index. It has also repurchased shares in order to boost its earnings per share. In this, it has repurchased shares worth £2.4 billion since 2021.
Tesco has also worked to improve and simplify its operations. It has sold a majority stake of its bank and exited its international markets.
The management hopes that the strong performance will continue, with its retail profit set to be £2.9 billion.
Most notably, Tesco is still a highly undervalued company despite its recent stock performance. It trades at a price-to-earnings ratio of 13.4, lower than the FTSE 100 index average of 14.4. It is also much lower than other popular retailers like Walmart and Kroger.
Tesco share price analysis
TSCO chart by TradingView
The daily chart shows that the TSCO stock price peaked at 370p in September, and has now pulled back to 360p. It has remained above the 50-day Exponential Moving Average (EMA), meaning that bulls are in control.
Most importantly, Tesco shares have formed a bullish flag chart pattern. This pattern is characterized by a long vertical line and a rectangle chart pattern. In most cases, this pattern usually results into a strong breakout in the long term.
Therefore, the stock will likely have a strong bullish breakout, with the next point to watch being at 370p, its highest point in September. A break above that level will point to further gains as investors target the next psychological point at 400p.
On the flip side, a drop below the key support at 350, its lowest swing on October 3 will invalidate the bullish view.
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