Despite trading at levels not seen since 2011, there’s a surprising amount of value left in Tesco’s £4+ share price after H1 results
Tescoâs (LSE: TSCO) share price is at a level not consistently seen since January 2011. The latest catalyst for this bullish position was its H1 fiscal-year 2025/26 results, released on 2 October.
The UKâs biggest supermarket group saw sales increase 5.1% year on year to £33.051bn. Over the same period, adjusted operating profit rose 1.6% to £1.674bn.
Free cash flow â a powerful driver for growth in itself â climbed 2.9% to £1.298bn, while net debt fell 3.8% to £9.884bn.
Meanwhile, earnings per share increased 6.8% to 15.43p, and the interim dividend was boosted 12.9% to 4.8p.
A risk to future earnings is any further significant tax rises on businesses or consumers in the upcoming 26 November Budget.
Upgraded forecasts
However, the grocery giant raised its full fiscal-year 2025/26 adjusted operating profit forecast to £2.9bn-£3.1bn, from £2.7bn-£3bn. It continues to anticipate free cash flow within its previous medium-term guidance range of £1.4bn-£1.8bn.
To achieve this, it will continue to build on its four strategic priorities.
The first is optimising value. Examples include its âAldi Price Matchâ on 600+ lines, and âLow Everyday Pricesâ on around 1,000 lines.
The second is enhancing the appeal of its Tesco Clubcard through digital capabilities. This includes a partnership with Pod to collect Clubcard points on EV charging at Tesco stores.
Third, providing more convenient shopping, including opening more stores and increasing home shopping capacity.
And fourth, reducing costs through greater productivity and enhanced business simplification. It is on track to deliver around £500m of its âSave to Investâ target for this year. This will help offset the effects of the last Budgetâs increase in employersâ National Insurance contributions.
Given all this, analysts forecast its profits will grow by an average of 9% a year to end fiscal-year 2028/29.
And it is growth in this measure that ultimately drives any firmâs share price and dividends higher over time.
So, how undervalued is the share price?
The discounted cash flow (DCF) model is the best way I have found to ascertain any stockâs true value.
It identifies where any share should be trading, derived from cash flow forecasts for the underlying business.
It also benefits from being a standalone valuation, unaffected by under- or over-valuations of the business sector in which a firm operates.
The DCF for Tesco shows its shares are 30% undervalued at their current £4.46 price.
Therefore, their fair value is £6.37.
My investment view
I prefer to buy stocks that are not just undervalued but that also offer a high yield. This is because I want to reduce my working commitments by optimising dividend income, aged over 50 as I am.
Tesco paid a total dividend this year of 13.7p, giving a current yield of 3.1%. This compares to the present 3.3% average of the FTSE 100 and is below the 7%+ I look for.
Therefore, it is not for me.
However, I believe its strong earnings growth prospects should push its share price to its fair value over time. I also think it will drive its dividend yield higher.
Consequently, I think it is well worth other investorsâ attention.
The post Despite trading at levels not seen since 2011, there’s a surprising amount of value left in Tescoâs £4+ share price after H1 results appeared first on The Motley Fool UK.
Should you invest £1,000 in Tesco PLC right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesco PLC made the list?
More reading
- 3 UK shares to consider this month as major brokers raise their price targets
- £5,000 invested in Tesco shares 2 years ago is now worthâ¦
- Tesco shares reach new 18-year highs! Time to buy in?
- As the Tesco share price is boosted by a double-digit dividend rise, should we consider buying?
- 3 reasons to like Tesco shares
Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco Plc. 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.
