The investment case for UK supermarket leader Tesco presents a complex picture, as robust operational results clash with growing caution from some market observers. Despite the retailer continuing to deliver solid financial performance and committing to future-focused investments, a recent rating downgrade from analysts at Jefferies has sparked debate. The core issue under scrutiny is whether the stock’s valuation has become stretched following a significant rally.
Strong Fundamentals Underpin the Business
Tesco’s underlying business health provides a solid foundation. For the first half of fiscal 2025/26, the group reported a 5.1% increase in revenue to £33.05 billion. Adjusted operating profit saw a modest rise of 1.5% to £1.67 billion, driving earnings per share (EPS) up by 6.8% to 15.43 pence. This operational strength is further evidenced by several key metrics:
* Free cash flow grew 2.9% to £1.3 billion.
* The interim dividend was lifted by 12.9% to 4.8 pence per share.
* Market share in the UK expanded to 28.3%.
Analyst Consensus Fractures Amid Valuation Concerns
Market experts are currently divided. On December 15, Jefferies shifted its rating on Tesco shares from “Buy” to “Hold.” Notably, the bank simultaneously raised its price target slightly from 440 pence to 450 pence. Jefferies cited a more challenging macroeconomic backdrop and intensifying competition as primary reasons. While acknowledging Tesco as a “best-in-class” operator with long-term potential, the analysts expressed concern that the equity valuation was trading at a multi-year high. The stock has appreciated more than 32% since the start of the year.
Should investors sell immediately? Or is it worth buying Tesco?
This cautious stance is not universal. In contrast, Citi increased its price target to 510 pence on December 12, implying an approximate 16% upside from current levels. Some discounted cash flow (DCF) models even suggest the shares could be undervalued by as much as 32%. Technically, the share price, hovering around 440 pence, sits below its 20- and 50-day moving averages—indicating near-term pressure—but remains above the 200-day average.
Strategic Moves Position Company for Future
Looking ahead, Tesco is advancing several strategic initiatives. A newly announced three-year partnership with AI start-up Mistral AI is designed to integrate artificial intelligence into areas like data analytics and customer service. Concurrently, the company is preparing for peak seasonal demand through local warehouse initiatives. The next key test for the business will be the full-year results anticipated on April 9, 2026, which must demonstrate whether the current operational momentum can be sustained.
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