Tesco Value

Investing in Tesco Plc shares

At the time of writing this Tesco Plc share price sits at 287p. This is well below its 52 week high if 388p and extremely close to its lowest price of 280p. There have been ongoing recent reports that the likes of discount supermarkets Aldi and Lidl are snatching market share from the "Big Four" supermarkets (Tesco, Sainsburys, Asda and Morrisons). Tesco market share has slipped in the last couple of years from its stable 30% to around 27%. In addition, this week has seen the exit of Tesco Finance Director Laurier McIlwee, which many have suggested as symptomatic of severe disharmony amongst the Directors. In combination, the issues that Tesco faces has resulted in the share price falling a long way off from its former 10 year high of nearly 600p.

Tesco Value!

For investment ideas I try to look for great businesses that have fallen on hard times. In the case of Tesco, I believe that the Company is now vastly undervalued. The Company still generates bags of cash, with plenty if cash in its coffers to invest or defend itself in a price war. I get the feeling that many analysts are forgetting that this Company has consistently made between 1 and 2 billion pounds per year for the last few years, and that it generated £64billion in revenue in 2013. 

We mustn't forget that Tesco is in a period of consolidation, particularly as it pulls out of America. Tesco will need to start to re-compete for the UK market just as it did in 1995 when it overtook Sainsburys as the UK's largest supermarket.

Running the numbers on your Tesco investment

So what is Tescos worth? This is a very subjective question. No two analysts will be able to produce exactly the same numbers as there may be thousands of assumptions that need to be made on those numbers. 

However, a Company's value should scream out to you. In the case of Tesco we can take it's free cash flow per share and project it forward as if it declines at 1% per annum then even at a discount rate of 10%, the fair value of the Company would be 360p. Given that today's market price is 280p, this current price appears to scream that the Company is currently cheap.

Tesco results are being announced Thurday 17 April 2014. I think until this happens markets will continue to be jittery about the price. My assumption is that the results will show (as expected) a decline in the Company's performance. Following this announcement I intend to buy a small stake in the Company.

Of course, all this assumes that Tesco will not decline in performance significantly in the future. Let me know your thoughts?

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