Tesco’s Market Surge: Analysts Forecast Strong Growth in Next 12 Months!

Tesco’s Shareholders to Receive a Bigger Dividend Than Last Year

Tesco’s (LSE: TSCO) recent share price surge has certainly caught the attention of investors. Since April 10th, the UK’s largest retailer has experienced a remarkable 20% jump in market cap, far outpacing the FTSE 100’s performance during the same period.

This uptick is a significant reversal from earlier concerns, particularly when a potential pricing war with Asda seemed to put pressure on the stock. So, what’s behind this shift in investor sentiment, and what does the future hold for Tesco’s stock price in the next 12 months?

Tesco’s Growing Market Share

In the highly competitive UK grocery sector, even a modest gain in market share can be a major victory, and that’s precisely what Tesco has achieved. According to its latest interim results, Tesco now commands 28.3% of the British grocery market—its highest market share in nearly a decade. On top of that, like-for-like sales and product volume growth both exceeded expectations, which helped generate £1.75 billion in free cash flow. This boosted the return on capital employed to a healthy 14.6%.

This is undeniably positive news for the company. However, despite these strong results, Tesco decided to lower its full-year guidance for underlying operating profits. This move initially led to a dip in the share price, as investors often view such reductions with skepticism.

But Clive Black, an analyst at Shore Capital, actually praised the move, calling it Tesco “getting the knuckle-duster out.” It appears that Tesco’s management is preparing for a potential pricing war, giving themselves the flexibility to cut prices and remain competitive while adjusting investor expectations. With Tesco’s financials in far better shape than its rival Asda, many investors have begun placing their bets on the heavyweight retailer.

What Analysts Are Saying

While lowering prices might hurt short-term profits, it’s expected to help Tesco protect its newly gained market share and ease the burden on consumers during tough economic times. This approach seems to be an example of “short-term pain for long-term gain.” Tesco’s proven track record and solid financials have prompted most institutional investors to either reaffirm or issue new “Buy” ratings for the stock.

Deutsche Bank is the most optimistic, setting a 12-month share price target of 440p. Meanwhile, Jefferies is more cautious, with a target of 350p. The average consensus currently places the Tesco share price at around 387p, which is roughly where it is trading now. This doesn’t suggest much upside for value investors at the moment, but it may be a reasonable entry point for long-term investors, especially if Tesco continues to expand its market share even amid a potential pricing war.

For investors looking to assess Tesco’s long-term potential, diving deeper into the company’s fundamentals could offer some rewarding insights. Only time will tell if Tesco can maintain its momentum and continue to expand its position in the market.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco Plc. The views expressed on the companies mentioned in this article are those of the writer and may differ from the official recommendations in our subscription services, such as Share Advisor, Hidden Winners, and Pro. At The Motley Fool, we believe that considering diverse insights makes us better investors.