Does Tesco PLC’s (LON:TSCO) June Stock Price Reflect Its Future Growth?

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Tesco PLC (LON:TSCO) is considered a high growth stock. However its last closing price of £2.251 left investors wondering whether this growth has already been factored into the share price. Below I will be talking through a basic metric which will help answer this question.

View our latest analysis for Tesco

Has the TSCO train has slowed down?

Investors in Tesco have been patiently waiting for the uptick in earnings. If you believe the analysts covering the stock then the following year will be very interesting. Expectations from 15 analysts are bullish with earnings per share estimated to rise from today’s level of £0.136 to £0.208 over the next three years. This indicates an estimated earnings growth rate of 12% per year, on average, which signals a market-beating outlook in the upcoming years.

Is TSCO available at a good price after accounting for its growth?

Stocks like Tesco, with a price-to-earnings (P/E) ratio of 16.49x, always catch the eye of investors on the hunt for a bargain. In isolation, this metric can be a bit too simplistic but in comparison to benchmarks, it tells us that TSCO is overvalued compared to the GB market average ratio of 15.96x , and undervalued based on its latest annual earnings update compared to the Consumer Retailing average of 19.07x .

LSE:TSCO Price Estimation Relative to Market, June 4th 2019
LSE:TSCO Price Estimation Relative to Market, June 4th 2019

Tesco’s price-to-earnings ratio stands at 16.49x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. However, to be able to properly assess the value of a high-growth stock such as Tesco, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock’s valuation. A PE ratio of 16.49x and expected year-on-year earnings growth of 12% give Tesco a higher PEG ratio of 1.43x. This tells us that when we include its growth in our analysis Tesco’s stock can be considered slightly overvalued , based on fundamental analysis.

What this means for you:

TSCO’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are TSCO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has TSCO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of TSCO’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.