The Pros And Cons Of Investing In Tesco PLC

The Motley Fool

Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) and assessing whether the positives surrounding the firm's investment case outweigh the negatives.

Sales growth still stalling

Tesco continues to suffer from the fragmentation of the grocery sector, as budget retailers and premium stores eat away at the top and the bottom of the market.

Indeed, latest Kantar Worldpanel statistics showed sales growth in the country's four largest supermarkets -- all of which occupy the sector's middle ground -- underperform the market average of 3.2% during the 12 weeks to November 11, with Tesco itself posting the worst result with a rise of just 0.7%. By comparison, Aldi and Lidl saw sales rise 31.1% and 13.8% correspondingly, while Waitrose punched growth of 8.8%.

Online businesses heading higher

However, Tesco has proved itself a star operator in red-hot growth area of online shopping over many years, and saw sales growth at its online business edge to 13% during February-August, up from 12.8% in 2012.

And the retailer continues to ramp-up its innovations here to facilitate future expansion. Last week Tesco increased the number of third-party retailers trading on its 'Marketplace' to 50, trade paper The Grocer reported, taking the number of non-food items sold through its website to more than 260,000. The firm is also offering its hugely-popular 'Click & Collect' store collection scheme to these sellers to stimulate demand.

Overseas operations keep dragging

Still, the company's online activities at home have proved less successful for its flagging operations foreign climes. Tesco reported a 67.8% decline in overseas trading profit in the first half of fiscal 2014, to £55m, while Asian profits excluding China dipped 7.4% to £314m.

The company was forced to scale back its operations in China last month by combining its 134 stores in the country with China Resources Enterprise's 2,986 shops. Following on the heels of its exit from the US through the sale of its Fresh & Easy venture, Tesco has received a bloody nose in failing to achieve the blockbuster gains it had thought it had identified in foreign markets.

Bag a bargain

Still, for those seeking access to a cheap supermarket selection, in my opinion Tesco offers plenty of potential for both growth and income seekers.

The chain currently deals on a prospective P/E rating of 11.2 and 10.7 for 2014 and 2015 correspondingly, just above the value watermark of 10. And with a dividend yield of 4.2% and 4.4% for this year and next, this comfortably outstrips a forward reading of 3.2% for the FTSE 100.

A shrewd stock pick

It could be argued that Tesco's persistent share price weakness is justified given the retailer's persistent sales troubles. But for risk-tolerant investors I believe that the firm, whose transformation programme and refocused attention back on its core UK markets -- not to mention leading presence in the red-hot online and convenience store sub-sectors -- could potentially deliver gold-lined gains over the longer term.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Tesco.