It’s no surprise to me that Tesco (LSE: TSCO) remains a popular pick with share investors. As Britain’s biggest retailer, it has the clout and the brand recognition to make a huge dent in the market.
It has the largest and best online operations of all the major supermarkets. And its focus on the defensive food market makes it an appealing pick in times of great economic uncertainty like these. This all explains why Tesco’s share price has risen a healthy 22% over the past 12 months.
Despite these gains, I think the FTSE 100 grocer still offers great value for money on paper. City brokers think profits here will rocket 170%-plus in fiscal 2022. This leaves the supermarket trading on a price-to-earnings growth (PEG) ratio of just 0.1. Any reading below 1 can suggest a stock has been undervalued by the market. At face value, it seems this is particularly so in Tesco’s case.
Why I’m not interested in Tesco’s cheap share price
So Tesco looks cheap on paper, sure. But it’s my opinion that its low valuation reflects the broad range of risks it faces. The supply chain crunch hitting its wafer-thin margins and causing stock shortages looks set to roll well into 2022. I think it could persist for longer too as Brexit-related changes cause trade barrier issues and a loss of drivers to move its stock.
A shortage of workers also threatens to drive up the cost of staffing its stores. Lidl last week announced plans to become Britain’s highest-paying grocer. From March, it will pay up to £11.30 an hour for new staff. It seems Tesco and its peers will be forced to follow suit as the scramble to fill vacancies heats up.
Too risky for me
My main concern for Tesco is the ambitious expansion plans of its rivals. Grocery retailers across the spectrum are investing heavily in their bricks-and-mortar estates and e-commerce channels to grab market share from the market leader.
Lidl was also in the news yesterday as it announced plans to have 1,100 of its low-cost stores up and running in the UK by 2025. This is up from 880 stores today and builds on the company’s previous plan for 1,000 retail units by 2023. It’s particularly dangerous for mid-tier retailers like Tesco as value becomes ever-more important in the eyes of consumers.
What’s more, the middle-of-the-road specialists also threaten to be run down by more expensive chains such as M&S and Waitrose. Demand for premium groceries is also growing strongly and retailers who offer differentiated, value-added products stand to gain at the expense of traditional mainstream grocers. And, of course, Tesco faces considerable danger from Amazon as it ramps up its attacks on the high street and in cyberspace.
Tesco’s share price is cheap, sure. But there are many other low-cost UK shares I’d rather choose to buy today.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon 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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