Tesco shares are top pick as major milestone looms

The prospect of Tesco (LSE:TSCO) shares hitting £4 for the first time in a decade was today flagged by a City bank as it drew parallels with the recent re-rating of US market leader Walmart Inc (NYSE:WMT).

UBS bolstered its earnings estimates for the next three years and has backed the FTSE 100 grocer’s shares to continue this year’s strong run by adding another 11% on today’s level.

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It pointed to the clear margin opportunity as the UK’s biggest supermarket benefits from its vastly improved competitiveness and the return of more rational market conditions.

The Swiss bank said the re-rating of fellow market leader Walmart offered a clear template for Tesco investors, including through alternative profit streams such as retail media.

Source: TradingView. Past performance is not a guide to future performance.

Harnessing the data and insights generated online and via 21 million Clubcard households, Tesco provides targeted options for brands to connect with customers via one-to-one personalised communications or broader mass reach opportunities.

Based on the Walmart experience, UBS points to £300-450 million of profit potential over the next five years from advertising. This would help underpin an advance in Tesco’s core retail margin from 4.3% to UBS’s estimate of 4.6% by 2029.

It notes that Walmart has evolved from a global retailer to a versatile technology-driven company adept at serving its customers and business partners in many more ways than the past, including through advertising, marketplace, fulfilment and data analytics.

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This week’s analysis by UBS comes ahead of Tesco’s interim results on 3 October, when the bank expects upward pressure on current full-year retail earnings guidance of at least £2.8 billion.

It said: “Tesco is our top pick in the sector. We see consistent delivery of market share gains coming from a period of significant improvement in price competitiveness and an improved retail offer overall.

“As the industry returns to a more normal operating environment with modest inflation and focus on volume growth, a rational environment continues to prevail with constrained competitors.”

The bank said the cash flow focus of rivals Morrisons and Asda due to their private equity ownership and levels of leverage limited their appetite to fight for market share.

It added that discounters Aldi and Lidl have been showing “clear discipline” on pricing despite Tesco and Sainsbury (J) (LSE:SBRY)’s matching them on a number of products.

UBS added: “We expect Tesco to continue to maintain the outperformance given the virtuous circle it has entered.”