Tesco is known to many US investors. In this analysis I will attempt to outline the key dynamics of this company and demonstrate why I consider it to be an excellent investment at the current market price. Readers should be aware that I have been a shareholder in Tesco PLC since 2006. In addition, since this analysis has been written for the Gurufocus value ideas competition there may be some unconscious element of positive bias, even though I have attempted to be objective. Therefore I would strongly advise investors to do their own further research before investing in this company.
Tesco is listed on the London Stock Exchange, stock code TSCO, and is also available on the US market as ...view middle of the document...
The newer financial services operations such as household and car insurance should hold up well in recessions although the personal loans and credit card business may be affected. Being non-cyclical, the telecoms business should also stand up well to economic downturns. Furthermore, with the company continually innovating and growing, as described below, this growth in itself offers some defence against recession.
This analysis will also explain how expansion into emerging markets should sustain earnings growth for many years.
Tesco's growth strategy for the future consists of two main aspects: the first is international expansion and the second is the development of new businesses in the UK which build upon the existing customer base and customer loyalty.
In terms of international expansion, this effort can be seen in the impressive growth of foreign sales. In 2005 foreign sales represented approx 24% of total sales revenue. By 2009 international sales had risen to 31% of the total, and if current growth rates continue, by 2015 international sales will reach approx 42% of total sales. This forecast is based on the growth rates from 2005 to 2009 which were 6.5% per year for the UK and 16% for international.
Tesco currently operates in the following international markets: Republic of Ireland, Poland, Hungary, Czech Republic, Slovakia, Turkey, South Korea, Thailand, China, Malaysia, Japan, India and the US.
Breaking down international sales into developed and emerging economies, results in 26% of total sales in emerging markets and 5% in the developed markets. These figures demonstrate Tesco's emphasis on emerging economies.
Tesco's strategy when commencing operations in a new market has been to initially set up a joint venture with a local partner. This strategy has been very successful, for example the joint venture with Samsung in South Korea and with CP foods in Thailand. By this means the company has reduced risk considerably while also exploiting the local knowledge and expertise of joint venture partners.
Currently the largest international contributor to sales is South Korea where Tesco has the number two position in terms of market share. In Thailand Tesco is the market leader.
Just to look at the Thai market one can get a picture of the enormous future potential in emerging markets. In 2009 sales revenue from Tesco Thailand totalled 2.34 Billion pounds, which compares to the UK total of 38.56 Billion (before sales tax). However if we look at the demographics of Thailand, the population is currently around 68 million compared to the UK population of around 62 million. The GDP per capita in Thailand is now around $7900 which compares to GDP per capita in the UK of $35,000. (CIA World Factbook 2009) We can see that as Thailand continues to catch up with the UK, due to the higher growth rate of the Thai economy, Tesco can look forward to continued growth for years to come.