Why I think the Tesco share price could crush the FTSE 100 this year

Businessman leading a chart upwards

The Tesco (LSE: TSCO) share price enjoyed a good run-up ahead of today’s trading update. This followed the release of industry data earlier this week suggesting Britain’s biggest grocer had delivered strong sales growth over the 12 weeks to 30 December.

Today’s statement from the supermarket chain didn’t disappoint, and the shares are up a further 2.2%, as I’m writing. I have high hopes the stock will outperform the FTSE 100 in 2019 and beyond.

Strong performance

Tesco reported a 2.2% rise in like-for-like sales in its UK stores over the six-week festive period. This followed 0.7% growth in the third quarter (13 weeks to 24 November). The business clearly has positive momentum. Indeed, it’s now posted 12 consecutive quarters of growth, demonstrating its ability to succeed, even as Aldi and Lidl continue their aggressive expansion.

Wholesaler Booker, which Tesco bought in March last year, delivered like-for-like sales growth of 6.7% in the Christmas period, while Republic of Ireland stores saw a 0.3% rise. The group’s Central Europe and Asia businesses both saw improved underlying performance, albeit like-for-like sales remained negative at -2.4% and -2.8%, respectively. Country-specific issues in these regions — Poland in the former, and Thailand in the latter — are being addressed.

At the group level, like-for-like sales over the six-week festive period increased 1.5%, while total sales (excluding VAT and fuel) increased 10.5%, thanks to a big contribution from the acquisition of Booker. All in all, management said it’s “confident in the outlook for the full year” and in delivering its longer-term ambitions.

Attractive valuation and prospects

Since his arrival in 2014, chief executive Dave Lewis has done a terrific job of turning round a business that was in a thorough mess. He’s achieved this by going back to basics with a retail-is-detail philosophy. I believe his strategy and the acquisition of Booker have put the company firmly on track to deliver sustainable growth and long-term value for shareholders.

At a share price of 214p, Tesco trades on 15.4 times forecast earnings per share (EPS) of 13.9p for its current financial year (ending February). The earnings multiple falls to an attractive 12.8 for the year ahead on forecasts of 20% EPS growth to 16.7p. The price-to-earnings growth (PEG) ratio is also highly attractive, being 0.64, which is deeply on the good value side of the PEG fair value marker of one.

EPS and EPS growth support forecast well-covered dividends of 5.15p for the current year and 7.35p for the coming year, giving a yield of 2.4%, rising to 3.4%. Furthermore, I expect earnings and dividends to continue to rise strongly beyond the coming year, driven by top-line growth and improving profit margins.

Defensive business

I’m not too concerned about how Brexit plays out, at least as far as Tesco’s concerned. In a recent article, my Foolish colleague Rupert Hargreaves discussed the company’s defensive qualities, contingency planning in the event of any Brexit-related supply chain disruption, and so on.

I agree with Rupert that Tesco’s unlikely to see any significant drop in sales due to Brexit. In view of its defensive nature, and the aforementioned valuation and growth prospects, I see a compelling investment case and rate the stock a ‘buy’.

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G A Chester 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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