LONDON -- I am backing supermarket leviathan Tesco (TSCO -1.38%) (TSCD.Y -1.02%) to put the difficulties of the past 12 months behind it and return to growth in the medium term. Shares in the firm have risen 15% since the start of 2013, and I am expecting them to gain traction as its strategy to rebuild its British operations comes to fruition.
Sales rise in first quarter but still lag rivals
Latest data from research consultancy Nielsen released this week showed sales at Tesco rose 4% in the 12 weeks to March 30 vs. the corresponding 2012 period. This was in huge part thanks to an early Easter period, which fell earlier than usual at the end of March.
Despite this sales improvement, Tesco's revenues increase still lagged that of its major supermarket rivals. Sales for both J Sainsbury and Asda increased 8.2% and 5% in the first three months, while Waitrose's demand increased 13.9%. And Tesco's U.K. market share slipped to 28.3% from 28.6%.
However, Tesco's plan to refocus attention on the domestic market is still in its early stages, and the company has both the experience and firepower to drag itself back to the top of the British retail pile over the longer term. The supermarket hiking its television and press advertising expenditure by 41% to 6.6 million pounds during March, for example, outpacing the 24% hike across the grocery space to 32.9 million pounds and illustrating the resources it has at its disposal.
Earnings forecast to bounce back from this year
City analysts expect earnings per share for the year ending Feb. 2013 -- results for which are due for release on Wednesday, April 17 -- to fall 17% to 31 pence. But earnings are expected to snap back from this year onward, with growth of 6% to 33 pence penciled in for this year before picking up speed. An 8% rise to 36 pence is forecast for 2015.
The supermarket is a popular pick among income investors owing to its generous dividend policy, and forecasters expect Tesco to keep the dividend stable at 14.8 pence for 2013 despite severe earnings pressure over the past year. And the firm is expected to hike the payout to 15.5 pence and 16.7 pence in 2014 and 2015, respectively, presenting a plump yield of 4.2% and 4.5% for these years. This compares with the 3.3% FTSE 100 average yield.
Tesco currently trades on a P/E rating of 11.5 and 10.6 for 2014 and 2015, respectively, providing a decent discount to a prospective earnings multiple of 12.7 for the entire food and drug retailers space. I believe that the firm offers excellent value as earnings look set to bounce back and dividends head substantially northwards once again.
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