Could the Tesco share price be the FTSE 100’s best Brexit buy?
Brexit is the biggest threat to your wealth right now because we don’t know (at this point) what will happen when the UK leaves the EU at the end of March.
And with this being the case, I the Tesco(LSE: TSCO) share price could be one of the best investments to own for the next 12 months. Today, I’m going to explain why.
Certainty in uncertainty
No matter what happens at the end of March, we can be sure that the British public will still need to eat and drink. So, Tesco shouldn’t see any immediate drop off in demand. Although if the economy starts to deteriorate, consumer spending habits will likely shift away from higher-priced branded items towards value.
Tesco is already well prepared on this front. The group has been investing heavily in promoting its own-brand products and has rebranded three-quarters of the range. Also, last year, the company launched its ‘Exclusively at Tesco’ range (95% complete), which is designed to take on the discounters by offering quality products at low prices.
In my opinion, these efforts should mean that consumers will continue to look to Tesco to meet their food and drink needs, no matter what happens after Brexit day.
Guaranteed supply
So, that’s demand sorted. But what about Tesco’s supply network? Disruption to companies’ supply networks is commonly cited as being the most significant risk the UK faces after Brexit day, as additional checks are imposed at ports and airports around the world. Indeed, some analysts have even speculated that there could be food shortages in the event of a no-deal. Tesco is doing everything it can to prevent disruption.
Management has already admitted that the company is stockpiling some packet and tinned foods to cope with any short-term disruption. It has also been revealed that the business is renting extra freezers to increase storage of frozen foods.
These efforts won’t make the company immune to any disruption, but they will limit its impact on the group. What’s more, Tesco’s new line of Jack’s retailers, designed to attack Aldi and Lidl head-on, source over 80% of products from UK suppliers.
Risk/reward
All of the above leads me to conclude that Tesco is well-prepared for any Brexit outcome. Whatever happens, customers will continue to shop at the store, and as long as management has planned effectively (it looks as if they’re doing just that), there should be food on the shelves for them to buy. There could be a slight disruption to the group’s operations, but I think it will be manageable overall.
That’s the worst case scenario. In the best case, where a deal is agreed and everything continues as usual, I think shares in Tesco could pop as the firm continues on its recovery trajectory. The City is expecting the retailer to report earnings per share growth of 27% in 2019, followed by an increase of 21% in 2020, giving an undemanding forward P/E of 13.2. That undervalues Britain’s biggest retailer, in my opinion.
Analysts have also pencilled in a prospective dividend yield of 3.4% for next year. That’s why I believe the Tesco share price could be the FTSE 100’s best Brexit buy.
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Rupert Hargreaves owns no share 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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