Why I'd beware Tesco share price and buy this FTSE 100 bargain instead

Tesco(LSE: TSCO) is back! The UK's biggest grocery chain (Sainsbury's-Asda merger notwithstanding) is up almost 30% over the last six months as new broom CEO Dave Lewis makes a successful supermarket sweep. However, I've spotted a more tempting FTSE 100 stock to consider.

Ups and downs

Despite its two-fisted fight back, Tesco remains a shadow of the global retail bruiser investors once rushed to buy. Just over a decade ago (on 14 November 2007), its shares peaked at 492p. Today, they stand at just 237p, having lost more than half their value.

Tesco's recent turnaround is nonetheless impressive. Turnover increased 2.8% to £57.5bn in the year to 24 February, or by 1.3% at constant exchange rate benefits. Like-for-like sales rose 2.3%. While a far cry from the glory years, this is impressive stuff given stagnant UK wages and economic uncertainty. Pre-tax profits soared to £1.3bn, from £145m, thrashing the average analyst forecast of £1.03bn.

Margin call

These figures were flattered by £290m worth of property sales at more 100 sites, although cost-cutting and efficiency improvements also played a part. Tesco's notoriously wafer-thin margins crept up 0.57 percentage points and hit 3% in the second half of the year. Lewis reckons he's on course to reach his target of 3.5-4% in 2019/20.

Tesco is generating plenty of cash, allowing it to slash debt while rewarding long-suffering investors with its first year-end dividend since 2014. City forecasters are predicting a yield of 2.1% by 28 February 2019, rising to 2.9% the year after, although my Foolish colleague Ian Pierce still reckons it's a dividend dud.

Fly me

The grocer also looks expensive, with a forward valuation of 17.5 times earnings. However, earnings per share (EPS) forecasts suggest this could be justified, with 16% growth expected in the year to 2019, then 22% the year after. That should shrink today's P/E to a more amenable 14.7 times earnings. 

Tesco is tempting, but International Consolidated Airlines Group(LSE: IAG) looks more of a bargain right now. Currently trading at just 6.7 times earnings, that makes it the second cheapest stock on offer in the entire FTSE 100 (after 3i Group). Yet its share price performance has been pretty solid, up 128% over five years, and 15% over the last 12 months.

Carrier trade

The £13bn British Airways parent is growing. Earlier this year, it reported a 3.2% rise in passenger revenue per kilometre, while available seat kilometres rose 2.8%. British Airways traffic did, however, fall 1.6%, but that was offset by a 6.4% rise at subsidiary Aer Lingus, 9.9% at Iberia and 17% at low-cost Spanish carrier Vueling.

As Royston Wild points out, the European short-range and long-haul markets are predicted to rise strongly, which should help drive further passenger numbers and revenue growth. City analysts are forecasting 4% EPS calendar growth this year, rising to 8% in 2019.

IAG's yield is a generous 4.6% and, better still, it boasts plenty of cover, at 3.8. There's the potential distraction of its rumoured bid for Norwegian, which is likely to prove a long-drawn-out process, even if it does ever fly through. Still, at today's price, IAG looks ready for take-off.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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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