Tesco share price has suffered a harsh reversal this month, erasing all the gains made earlier this year. After peaking at near 400p in February, the stock tumbled to a low of 320p, the lowest level since August 7 last year. This article explains why the TSCO stock has plunged and whether it is safe to buy the dip.
UK retail price war may hit Tesco margins and growth
The main reason why Tesco share price has crashed is that the market is bracing for price wars in the UK. These concerns jumped last week after Asda, the biggest retailer in the country announced huge price cuts.
The company will cut prices by an average of 22% on over 1,500 products. This is a continuation of price cuts that started in January, which imply that it has slashed prices on almost 10,000 products.
These price cuts are meant to boost its market share in the UK, which has slipped in the past few years. As such, odds are that other retailers like Tesco will also slash prices to match what Asda is offering.
Lower prices are good for shoppers, who will likely keep buying more. However, they will affect the retailers’ margins over time unless they use their scale to squeeze the suppliers.
Analysts caution that Tesco will be one of the most affected by the price wars, which may push it to issue a more cautious guidance in its next results. Most importantly, there are concerns on whether the company will continue growing its market share.
Tesco share price has also dropped after the company agreed to a 5.3% wage increase that will cost it over £180 million a year.
Read more: Tesco share price is beating Walmart, Kroger, and Target
TSCO business is doing well
The most recent half-year results showd that the company’s business is booming. Its total revenue rose to £31.46 billion from £30.4 billion a year earlier.
This growth was accompanied by high profits as the management took measures to slash its costs. The company’s adjusted operating profit rose by 15.6% to £1.64 billion.
Tesco has also continued to grow its market share in the country. The market share figure rose by 62 basis points as Asda woes continued at the time.
The management expects that its full-year operating profit will be about £2.9 billion, while the free cash flow will be between £1.4 billion and £1.8 billion.
What next for the Tesco share price
The stock market is often driven by fear and greed, and in Tesco’s case, a sense of fear has prevailed. In most cases, the fear-driven sell-off is usually short-lived as the market tends to adjust to the new normal.
Tesco has some positives that may propel its stock higher over time. It trades at a forward P/E ratio of 11.2, making it a bargain for a market leader in its business. It is growing its margins, and most importantly, it has a dividend yield of about 4.5%, higher than the average yield of the FTSE 100 index.
Tesco share price analysis
TSCO chart by TradingView
The daily chart shows that the TSCO share price peaked at near 400p this year and then plunged after the Asda price cuts. It has now slipped below the crucial support level at 337p, its lowest level on November 12.
Tesco stock price has crashed below the 200-day and 50-day moving averages, a sign that bears are in control. The Relative Strength Index (RSI) and the Stochastic Oscillator have moved to the oversold level.
Therefore, the stock will likely bounce back in the coming months. If this happens, the next point to watch will be at 350p.
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