The aim of the report is to use different valuation techniques to see if the current share price of Tesco plc is fair, undervalued or overvalued. Some of the findings will be compared with other firms in the same industries and share holders will be informed on whether they should buy, hold or sell.
Background information on Tesco
Tesco is the largest supermarket retail chain in the United Kingdom with Sainsbury being their closest rival. It is also the third largest retail chain in the world. In the beginning Tesco started off by selling basic groceries before diversifying into many different markets. In 2007 Tesco was operating in the following fields:
• General groceries
• Personal banking
• DVD sales and rental
• Clothing line
By the end of 2007 Tesco were operating in the following countries:
• Czech Republic
• Republic of Ireland
• South Korea
• United States of America
At the end of 2007 Tesco had a UK market share of over 30%, which is more than both Asda’s and Sainsbury’s market share combined. Tesco are continually trying to open up more chains around the world with aim of increasing market share. Tesco’s usual market strategy involves taking over failing retailers and then turning them profitable with their marketing experience and range of products.
Factors affecting the valuation
‘Undoubtedly, valuation in practice involves considerable guesswork’
Smullen, J, p 278, 2007
The quote above refers to the fact that it is unlikely for a valuation to be correct. This is because forecasts of future revenue and expenses are all predictions using the information from previous years. Unforeseen circumstances might arise which may have a huge affect on the valuation. Or if one of the percentage rate chosen is a little wrong this may also change a company from being undervalued to being overvalued.