Tesco share price outlook: rating upgrade as positive patterns form
Tesco (LON: LON:) share price retreated sharply this week as the recent momentum faded. The shares crashed to a low of 272p, much lower than this month’s high of over 284p. It has jumped by over 13% from its lowest level in June and by 45% from its 2022 lows.
Doing good in a difficult environment
The retail sector in the UK is not doing well. Data by the Office of National Statistics (ONS) revealed that the headline retail sales dropped by 0.9% in September, translated to a 1.0% YoY decline.
Core sales, which excludes the volatile food and energy prices, dropped by 1.0% and 1.2% on a MoM and YoY basis. All these numbers were much lower than what analysts were expecting.
US consumers are facing numerous challenges as the cost of living crisis continues. Data published this month revealed that the headline and core UK inflation remained above 6% in September.
Tesco, the biggest UK retailer is doing well, because of its scale and deep supply chain expertise. The most recent results showed that Tesco’s group sales jumped to £30.7 billion in the first half ofthe 23/24 financial year. Tesco retail’s operating profit rose to £1.4 billion. The company also worked to reduce its leverage as its net debt dropped to £9.9 billion.
The next key catalyst for the Tesco share price will be the company’s plan to exit the banking industry. It is working with Goldman Sachs (NYSE:) to come up with a good exit plan for this.
Tesco Bank is a relatively small part of the company. Its adjusted operating profit came in at £65 million in the first half, up from £52 million in the same period a year ago. I believe that this is a good move since it will simplify the company.
Exiting the bank will also have a good impact on its valuation since retailers tend to have higher multiples than banks. For example, Lloyds (LON:) Bank has a PE ratio of 6.27 while Tesco has 13.
Tesco share price forecast
TSCO chart by TradingView
The daily chart shows that the TSCO stock price has staged a strong recovery in the past few months. The current phase of the rebound happened after the shares formed a double-bottom pattern at 240.7p. It then moved above this pattern’s neckline at 261p.
Tesco shares are still above the 50-day and 100-day moving averages. Most importantly, they have also formed a cup and handle pattern, which is usually a bullish sign. Therefore, I suspect that the stock will continue rising as buyers target the next psychological level of 300p.
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