Is the Tesco share price heading for 500p?
The highest share price at which Tesco(LSE: TSCO) has ever traded is around 487p. This was achieved in late 2007, with the retailer experiencing a decline in its valuation in the following years. A bloated structure and a weak performance of the UK economy were key reasons behind this. With the stock trading as low as 143p in 2015, there has been a significant deterioration in the value of the UK's largest retailer.
Now though, the company is in the midst of a resurgence which has seen its share price soar to 260p at the present time. Is more growth ahead? Or should investors look elsewhere in the retail sector?
Under its current management team, Tesco is becoming a very different entity to that of previous years. In the past, it had sought to expand its operations into new areas, as well as through international channels. While this had created a larger business, substantial parts of it were inefficient and lacked profit growth potential. In other words, the company had become bloated and lacked direction.
Today, the company is focused on its core operation of being a UK-oriented grocery business. It has invested heavily in its products, as well as in areas such as customer service and the layout of its stores. This has helped it to compete in a crowded marketplace, while a more efficient supply chain and the disposal of non-core assets are set to boost its margins over the next few years.
With Tesco also having purchased cash-and-carry company Booker, it seems to be in an increasingly strong position versus peers. It is expected to report a rise in earnings of 18% this year, followed by further growth of 20% next year. Since it trades on a price-to-earnings growth (PEG) ratio of 0.8 and seems to have a sound strategy, significant share price growth could be ahead.
Also offering an improving outlook in the retail sector is Sports Direct(LSE: SPD). The company reported an improvement in its profitability last week after what has been a challenging period for the business. UK sales are still under pressure, while the company's reputation is only likely to improve at a relatively slow pace.
Looking ahead though, Sports Direct does appear to have that improving outlook. The company's bottom line is forecast to increase by 13% this year, followed by further growth of 16% next year. And despite rising by around 30% in the last 12 months, its shares have a PEG ratio of 1.4 at the present time. This suggests that investors are including a margin of safety in its valuation, with mixed past performance being the possible reason.
Clearly, the outlook for the wider UK retail sector remains tough. Sales performance across the industry could come under pressure if consumer confidence remains low. But with what seems to be a solid strategy and recovery potential, Sports Direct could be a worthwhile buy for the long run.
Peter Stephens owns shares of Tesco. 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.