Why Tesco is the best supermarket stock right now

There's still work to do, but our head of markets is impressed with these results.

While Tesco (LSE:TSCO) may not have shot the lights out, this update for Christmas and the third quarter makes for rather stronger reading than those of its competitors.

The core UK and Republic of Ireland business, which includes Booker, represents 80% of group sales and was boosted overall by 0.4% on a like-for-like basis. The Booker business in particular continues to vindicate Tesco’s decision to spread its wings and buy the company, while the group’s online presence made a meaningful contribution in meeting overall customer order requirements. 

Operationally Tesco had previously displayed impressive operating profit and free cash flow numbers, while also reducing net debt by 7.8%, and it seems that this momentum has been maintained as the company approaches the final quarter of its year.

Strategically, quite apart from the success of the Booker acquisition and integration, there are also opportunities which will arise from the Carrefour tie-up, while the company has the financial firepower to inflict further pressure on its rivals.

Tesco’s ability to generate cash underpins a dividend yield of 2.7% which, while not generous, has ample room to grow, as evidenced by the 59% hike in the dividend in October.

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

There are areas in which Tesco needs to improve, most notably the restructuring of the European unit which is currently proving a drag on sales numbers. The transformation of the business in Poland in particular will need time to take effect, although with the Central European operation representing just 9% of overall sales, this is not vital to Tesco’s ongoing growth.

Similarly, the Asian business (also 9% of overall sales) is currently under strategic review, which could result in the disposal of the business for a sum estimated to be in the region of $9 billion. 

In addition, Aldi and Lidl continue to make inroads into the sector, Asda could still be up for sale from its owner Walmart (NYSE:WMT), which would likely be accompanied by an aggressive stance from any new owner, while the likes of other potential new entrants such as Amazon remains an ominous possibility.

Even so, Tesco has likely done enough with this update to cement its place as the preferred play in the sector. The shares have reacted to steps the business has taken to consolidate its position in recent times, having risen 21% over the last year, as compared to a 9.7% gain for the wider FTSE 100 index.

As such, the market consensus of the shares as a "buy" will be under little threat.