There are many reasons why I think this company is better positioned than other institutions to ride out all of the uncertainty and unpredictability dominating the current economic climate.
First, and possibly most important, as the country’s largest food and drink retailer, the firm has a captive market. As long as humans need to eat and drink, there should be a need for the company’s services.
However, with costs rising across the board for consumers and companies, demand for certain products could fall. This is where I think Tesco really comes into its own.
The enterprise has one of the largest logistics networks in the country. Its networks of trucks, trains and depots give it a unique competitive advantage over peers.
For example, several years ago the company started running trains from Spain full of produce to reduce costs and improve efficiency. The initiative has worked so well Tesco is expanding the network.
Thanks to this competitive advantage, management has announced that Tesco will try to keep food costs as low as possible for consumers. The company’s heavy investment in its infrastructure also means it can lower staffing costs through efficiency initiatives.
As well as these qualities, the corporation is incredibly diversified. It has a financial services business and mobile telecoms arm. Both of these divisions offer existing customers special benefits. This is another reason why Tesco is a consumer favourite. I think these benefits will draw consumers into the company at a time when bills are rising elsewhere.
That is not to say that the company is completely immune from the general pressures affecting the UK economy. It will have to foot the bill for rising energy prices and wage pressures. These may have an impact on its profit margins. The UK grocery sector is also incredibly competitive, and there are signs of a price war brewing. Tesco will have to ensure that it keeps prices as low as possible to maintain its relationship with customers.
Tesco shares valuation
The firm is likely to face some challenges as we advance, but I think Tesco shares look cheap considering the group’s competitive advantages.
At the time of writing, the stock is trading at a forward price-to-earnings (P/E) multiple of just 12.8. It also offers a prospective dividend of 3.8%. I think that looks appealing in the current interest rate environment.
Meanwhile, the company’s five-year average P/E ratio is around 17 suggesting the shares are selling at a discount to their long-term average.
So overall, considering Tesco’s competitive advantages, the company’s current valuation, and future prospects, I think the stock is worth buying for my portfolio today.
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Rupert Hargreaves 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.