HSBC analyst updated the financial outlook for Tesco (OTC:TSCDY) Plc. (TSCO:LN) (OTC: TSCDY), raising the supermarket chain's price target to GBP4.20 from GBP3.70. The firm continues to endorse a Buy rating for the stock. The adjustment comes as Tesco demonstrates a robust first half of the year, positioning it to potentially surpass its own forecast for the fiscal year 2025.
According to the analyst's assessment, Tesco's strong performance in the first half indicates that the company is on track to exceed the management's anticipated retail adjusted operating profit of at least GBP2.8 billion. This figure contrasts with the consensus from Visible Alpha, which projects a group operating profit of GBP2.97 billion, including a retail adjusted operating profit of GBP2.89 billion.
HSBC's projections are even more optimistic, with an estimated group operating profit of GBP3.04 billion, including retail adjusted operating profit of GBP2.96 billion and factoring in GBP500 million of cost savings.
The analyst highlighted Tesco's potential for substantial free cash flow (FCF) generation, anticipating between GBP1.4 billion and GBP1.8 billion before accounting for the expected proceeds from the bank sale, approximated at GBP0.7 billion. These funds are likely to be distributed to investors during the current or subsequent financial year.
This forecast is in addition to Tesco's committed GBP1.0 billion buyback for the current year, which includes an unchanged GBP750 million underlying buyback and a GBP250 million bank dividend, followed by a GBP750 million buyback in the fiscal year 2026.
The anticipated share buybacks, according to the analyst's statement, could represent 9-10% of Tesco's market capitalization over the next two years, based on the current share price. This strategic financial maneuvering by Tesco underscores the company's commitment to return value to its shareholders.
Tesco Plc has witnessed an upgraded stock price target by Citi, which has reiterated a buy rating based on recent UK Kantar grocery data. The new price target has been set at £4.25, up from the previous £3.50. Citi's revised outlook comes ahead of Tesco's first half of fiscal year 2025 results, expected soon.
The firm forecasts a 0.4 percentage point acceleration in Tesco's second-quarter 2025 retail like-for-like sales to 3.8%. Citi has also increased its UK forecasts for Tesco, predicting a stronger-than-anticipated performance with an estimated 5.1% increase in UK like-for-like sales for the second quarter of 2025.
Citi anticipates a modest sequential improvement in Tesco's Booker wholesale business and a positive outlook for Central Europe. As a result of these forecasts, Citi has raised its estimate for Tesco's fiscal year 2025 retail earnings before interest and taxes by 1% to £2,867 million.
InvestingPro Insights
Complementing the positive outlook from HSBC analysts, Tesco Plc. (TSCDY) also shows compelling data points and strategic moves that may interest investors. An InvestingPro Tip highlights that Tesco has a perfect Piotroski Score of 9, indicating strong financial health. Additionally, management's aggressive share buyback strategy is not only a sign of confidence in the company's value but also supports the potential for earnings per share (EPS) growth.
From a valuation perspective, Tesco is trading at a low P/E ratio relative to near-term earnings growth, with a current P/E ratio of 21.75 and an adjusted P/E ratio for the last twelve months as of Q4 2024 at 13.91. This suggests that the stock may be undervalued considering its earnings trajectory. Moreover, the company's dividend yield as of 2024 stands at an attractive 5.23%, coupled with a significant dividend growth of 82.06% over the last twelve months, rewarding income-focused investors.
For those considering adding Tesco to their portfolio, there are additional InvestingPro Tips available, which delve deeper into the company's financial health and market performance. In fact, there are 11 more tips listed on InvestingPro that could provide further insights into Tesco's investment potential.
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