‘Unattractive risk reward’ – JPM warns about Tesco share price

Tesco (LON: TSCO) share price retreated by more than 2% on Tuesday after a new downgrade by analysts at JP Morgan. The stock plunged to a low of 255.8p, much lower than last week’s high of 268p. 

Headwinds remain

Tesco stock price has recently lost momentum after surging to a high of 277.9p in the first five months of the year. It has now retreated by more than 7.55% from its YTD high.

The company, like other British retailers, is facing significant headwinds as the cost of living crisis in the UK continues. This situation has led to a low growth of retail sales in the country. It is against this backdrop that analysts at JPM downgraded the company, saying:

“We think current sentiment and valuations make for an unattractive risk reward as investors start to reassess portfolios into 2024, when we expect grocers’ P&L and cash flow dynamics to worsen vs 22-23, triggering downside risk to consensus.”

Tesco stock also retreated after another report by Barclays. In it, the company said that credit card spending slowed in August. They rose by 2.8% in August after rising by 4.0% in the previous month. Supermarkets saw weaker spending growth of 4.5%.

These numbers are signs that Tesco and other retailers are facing headwinds as inflation remains at an elevated level. The most recent results showed that Tesco’s revenue rose by 8.2% in Q1 to 14.83 billion. For a company like Tesco and in this operating environment, that growth is actually good.

Tesco tends to do modestly well compared to other retailers when there is significant pressure in the country. For one, the company has a lot of reach in the country and has a great supply chain structure.

The challenge for Tesc is that it is highly overvalued now. It has a trailing 12-month PE ratio of 27.67, which is higher than the sector median of 20.65. Its forward EV to EBITDA of 6.60 is higher than its peers.

Tesco share price forecast

TSCO chart by TradingView

The daily chart shows that the TSCO stock price has moved sideways in the past few months. Most recently, the shares have formed a horizontal channel whose support and resistance levels are 244.4p and 264.3p. 

The stock dropped and moved below the resistance point at 264.3p. It has moved slightly above the 25-day and 50-day moving averages. The Relative Strength Index (RSI) has drifted downwards.

Therefore, the outlook for the shares is bearish, with the next support being at 244.4p, the lower side of this channel. This price is ~5.10% below the current level.