Tesco plc is bouncing back, but I still wouldn't buy it

Tesco

Investors have been asking if it's time to buy Tesco(LSE: TSCO) shares again after the rot set in a decade ago. The assumption by many back then was that yes, of course Tesco would soon be back to its winning ways at the vanguard of the UK's supermarket sector... but, 10 years!

Tesco is finally turning the earnings tide back to growth, posting a 66% rise in EPS for the year ended February (though that was still way below pre-catastrophe levels).

And there are decent double-digit rises on the cards for this year and next, which even put the shares on a PEG ratio of just 0.4 -- a level that often has growth investors salivating.

But despite that, I'm still not buying, for the simple reason that I think today's valuation is too rich with the shares at 180p.

Too much optimism

Forecasts suggest a forward P/E of 18.5 this year with the dividend set to yield just 1.7%. Further progress would bring the P/E down to 14 by 2019, with the dividend expected to be yielding around 3% by then.

That's very close to the FTSE 100's long-term average on both counts, and I reckon it would be a fair valuation for Tesco... had we already had the growth that's already built into today's price, but not with such hopes still two years away.

Also, those levels of earnings growth are dependent on Tesco's ability to lift its operating margin rather significantly over the next couple of years. Last year we saw a rise in the underlying figure from 1.8% to 2.2%, but the company seems pretty set on getting those margins up to 3.5% to 4% by the 2019/20 year.

And that sounds like a very difficult thing to achieve to me.

Even worse?

I'll tell you a company whose shares I like even less than Tesco's -- Wm Morrison Supermarkets(LSE: MRW).

Morrison shares have stormed ahead by 77% since December 2015, to 246p -- and for the life of me, I can't see any justification for it.

In its most recent update, Kantar Worldpanel suggested sales had increased by 3.8% over the 12 weeks to 18 June. But even if you think that's sustainable (and I don't), Lidl and Aldi are expanding massively faster than anyone else.

And that's surely where the big competition for Morrison is increasingly coming from, with the market share of the cheap two rising while Morrison's is still dipping.

Morrison did post a 40% recovery in earnings last year after years of falls, but EPS growth is expected to slow to 13% this year and 7% next.

Worth more than Tesco?

That's way behind forecasts for Tesco, yet Morrison shares are valued significantly higher -- they'd command a P/E of over 20 by January 2018, and still up as high as 19 a year later. The 2019 dividend would be lower than Tesco's too, with a yield of 2.7%.

And even then, I don't actually have a lot of confidence in those predictions, as they don't seem to take into account the accelerating nature of supermarket competition right now.

I get the general feeling that the Great British investing public is still in a love affair with supermarkets and is irrationally overpricing them -- and that's when you can't even buy shares in the sector's two biggest growth prospects.

It's an attraction I don't share, and these two are firmly in bargepole territory for me.

A much better prospect

If you turn your nose up at the 'growth' prospects from Tesco and Morrison as I do, I have another to share with you that I think you'll like a lot better.

Our report, A Top Growth Share, looks at a hot FTSE 250 company that has already delivered handsome rewards to shareholders. And with sales expected to top the £1bn mark in the near future, there should be plenty more to come.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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Save money on shopping: ten great tricks
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Save money on shopping: ten great tricks

The more work you are prepared to put in, the more you stand to save. If you put your shopping list into mysupermarket.com, you can identify where each individual items is cheapest, and can technically buy every single item at its lowest possible price.

If that sounds a bit too much like hard work, a reasonable compromise is to shop at two supermarkets: once at the weekend and once mid-week. You can buy each item at the cheapest of the two shops, and save money without devoting hours to shopping.

There are several deal-sharing sites, including hotukdeals.com and latestdeals.co.uk. Most of them have a ‘freebies’ section, where you can get items completely free, and all have a section where they post fantastic deals that are well worth taking advantage of.

They will often point the way to coupons for brilliant discounts too.

The more time you have spare to spend looking for these, the more you can save.

It’s worth following your favourite brands on Facebook or Twitter. It’s also important to pick up in-house magazines, try your free local paper, and check any letters from supermarket loyalty schemes for your vouchers. If you have a Nectar card, visit the website before you shop, so you can upload the latest deals to your card.

While you’re in-store, keep your eyes peeled for promotions on packets, and on receipts. Often the deal-hunting websites will offer a short cut to many of these, but if you have the opportunity to do some legwork, you will find plenty of others.

Compare the price of your branded goods (after you use the coupon) with the cheapest supermarket alternative. If the discount makes it the cheapest option, then feel free to use it immediately.

However, if it doesn’t bring the price down below the own brand price, then don't throw it away. Hang onto the coupon, and check Mysuupermarket.com every few days to see if there’s an offer running on the brand at any time before the coupon expires. A deal plus a coupon is often the cheapest option.

Prices change all the time, but it pays to have a shopping list annotated with the usual price - or an old receipt - on hand when you are shopping. When something is on sale, compare it to the usual selling price from your list, to decide if it’s really as good value as it purports to be.
The frugal experts have decent storage areas at home, so if there’s a very special deal on washing powder or toilet paper, tins or toiletries, they can stock up for a few months at a knock-down price. It’s not generally worth doing on fresh produce, or packets with a short shelf life though, because throwing something away that’s out of date will undo all of your good work.
There can be some incredible bargains in the ‘yellow sticker’ sections of the supermarket. Most stores will have a spot for fruit and vegetable reductions, somewhere for chilled food price cuts, one for bakery products, and a final one for those with a longer shelf life that may be a bit battered, or separated from the outer packaging. Check them all for a possible discount.

The ’yellow sticker’ items will usually be reduced at least twice a day: once in the afternoon and once later in the evening. If you can wait to shop at around 7.30pm or 8pm you can get astonishing discounts.

If you want to time your shop exactly, then your best bet is to ask in store when they do their final reductions - don't be shy!

Get to know the rules around freezing ‘yellow sticker’ items, so you can buy when they are cheapest and use over the following weeks and months.

Don't assume something is perishable without checking. Everything from cheese to beansprouts is fine to freeze as long as you treat them correctly (beansprouts need blanching, chilling in ice water, and freezing immediately).

It’s never worth buying something just because it’s cheap: you also have to be able to factor it into your life. If you can't immediately think how you would use that over-ripe avocado, a pack of cut-price tongue or kippers, then don't buy them.
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