Are Tesco shares a 'buy'?
Year to date, Tesco(LSE: TSCO) shares have performed very well. Its share price has risen from 209p to 264p, which represents a gain of 26%. By contrast, the FTSE 100 index has gone nowhere and is trading very near the level it was trading at in early January. Does Tesco's share price momentum make the stock a 'buy'? Let's take a look at the investment case.
Improving performance
After a tough few years, the outlook certainly looks to be improving. Full-year results, released in April, showed signs of a turnaround, with group sales increasing 2.3% and operating profit before exceptional items rising 28%. And a Q1 trading update released in June showed signs of further progress, with group like-for-like sales rising 1.8% for the quarter (a 10th consecutive quarter of growth), including 3.5% growth for the UK and Republic of Ireland. Chief Executive Dave Lewis was upbeat about the group's performance, stating: "Our growth plans are on track and we are pleased with the momentum in the business." So Tesco definitely appears to be on the road to recovery. But do the shares offer value right now?
Personally, I'm not seeing enough value in Tesco shares to be bullish towards the stock. For starters, with analysts forecasting earnings per share of 14.1p this year, the forward-looking P/E ratio is 18.7. That looks a little high in my view, given the intense competition the group is likely to continue facing from both the German discounters and a Sainsbury's/Asda merger. There's also very little appeal from a dividend-investing perspective, with the prospective yield on the stock currently a low 1.9%. As such, despite the stock's uptrend, I don't think Tesco is a 'buy' right now.
Attractive value
One FTSE 100 stock that I do think offers considerable value today is ITV(LSE: ITV). Its valuation is low and its dividend yield is high, which leads me to believe that patient investors could be rewarded with healthy total returns over the medium-to-long term.
ITV released half-year results in late July and there was a lot to like about the group's performance. For the six months to 30 June, total external revenue increased 8% with non-advertising revenues rising 14%. Of particular note was the revenue growth from the content side of the business, ITV Studios, which rose 16%. 48% growth in online revenue was also impressive. While adjusted earnings per share did fall 8%, the group raised its interim dividend by 3% reflecting the board's confidence in the business. The group also advised that its 'strategic refresh' was well underway and that in the coming years it intends to transform itself into a "structurally-sound integrated producer broadcaster" in order to stay relevant in a market that has changed considerably in recent years due to advances in technology.
With analysts forecasting earnings and dividends per share of 15.5p and 8.1p respectively this year, ITV currently trades on a forward P/E of just 10.7 and sports a high prospective yield of 4.9%. Those metrics offer value in my view and as such, I rate the stock as a 'buy'.
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Edward Sheldon owns shares in ITV. The Motley Fool UK has recommended ITV and 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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