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Tesco’s (LSE: TSCO) share price is close to its 13 June one-year traded high of £3.99.
This does not necessarily mean there is no value left in the stock. It could be that the underlying business is just worth more than it was before.
Alternatively, it might be that the stock’s price is close to overshooting its fair value or has already done so.
Price and value are not the same thing and pinpointing the difference is vital in making big profits over time.
I took a close look at Tesco’s business and ran the key numbers to find out which is true here.
The business
Its 12 June Q1 update showed like-for-like (LFL) year-on-year sales growth of 4.6% to £16.383bn. LFL sales measure the growth of a retail business from its existing stores and space, excluding the impact of new store openings or closures.
Over the period, its UK market share rose 0.44% to 28%, marking 24 consecutive four-week periods of gains.
The supermarket giant reiterated its £2.7bn-£3bn adjusted operating profit for the full 2025/26 year ahead. It did the same for its free cash flow target range of £1.4bn-£1.8bn.
It added that its market sector remains intensely competitive. I agree this is a risk for the firm that could cause its margins to shrink over time.
However, consensus analysts’ estimates are that its earnings will increase 6.3% a year to the end of fiscal year 2027/28.
The key numbers
The first part of my share value assessment is comparing Tesco’s key share price measurements to those of its competitors.
On the key price-to-earnings ratio Tesco currently trades at 16.1 against its peers’ average of 17.8. These comprise Carrefour at 12.4, J Sainsbury at 15.3, Koninklijke Ahold Delhaize at 18.2, and Marks and Spencer at 25.3.
So, Tesco is undervalued on this measure, despite its recent price surge.
However, on the other two key stock price measures I most trust – price-to-sales, and price-to-book – it is overvalued.
On the former it trades at 0.4 compared to a competitor average of 0.3. On the latter it is at 2.2 against a peer average of 1.6.
I ran a discounted cash flow analysis to get to the bottom of this valuation. This highlights where any firm’s share price should be, based on future cash flow forecasts for the underlying business.
This shows the stock is 10% undervalued at its current price of £3.94.
Therefore, the fair value for the shares is £4.38.
My view
This undervaluation is too small for me to buy it as a stock geared to share price growth. The number could be achieved and then lost again from just high market volatility. The minimum potential I look for in such growth stocks is a 20% price undervaluation to fair value. And there are plenty of other stocks offering that discount.
There is nothing to excite me about the dividend yield either. This is currently 3.5%, which is the same as the present FTSE 100 average. Analysts forecast it will rise to 3.9% in fiscal year 2026/27, and to 4.2% in 2027/28.
My minimum yield for a dividend stock is 7%, so Tesco’s is nowhere near that. Again, several other stocks meet that requirement and surpass it.
Consequently, I will not buy it.
This story originally appeared on Motley Fool
