As the Tesco share price plunges, is it a good value stock?

Tesco (LON: TSCO) share price is in a remarkable collapse as investors focus on the ongoing concerns about the UK economy. It dropped by more than 5% on Thursday and tumbled to the lowest level since January 2019. It has collapsed by more than 34% from the highest level this year.

Tesco faces significant challenges

Tesco and other British retail stocks like Boohooand Asos have come under intense pressure after Kwasi Kwarteng delivered his mini-budget. Most of these stocks have collapsed by more than 30% this year as investors brace for less retail sales.

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A key challenge for Tesco is that it is generally a slow-growth company. In July, the company’s results showed that its total revenue rose by just 2% in the quarter. The management then warned about the impact of inflation to its business.

Sadly, the situation has worsened in the past few weeks. A key challenge for Tesco and other retailers is that the British pound has collapsed to the lowest level on record. It has fallen by more than 20% this year alone.

Therefore, a weak pound has several implications for Tesco and other retailers. For one, it will spur higher inflation by making it more expensive to import goods. This is an important fact since Tesco sources its products internationally. As such, the firm will need to pay more money in pound terms to buy the same products.

Another key challenge for Tesco is that the company will likely see weaker demand as inflation rises. Historically, a wage squeeze usually leads to weak retail sales. 

Still, the collapse of the British pound raises the question of whether Tesco will now become a good buyout target. The company’s market cap has plummeted to about 15 billion pounds. This means that American PE companies can easily buy the firm. 

The only challenge for such a buyout is that it would be reviewed by UK authorities. Also, with interest rates rising, getting financing would not be easy. For example, Goldman Sachs made a big loss for financing Morrison’s acquisition.

Tesco share price forecast

The daily chart shows that the TSCO stock price has been in a freefall in the past few months. The decline accelerated when the shares crashed below the support level at 242p, which was the lowest level in June. 

As a result, the shares have crashed below all moving averages while the Relative Strength Index (RSI) has moved to the lowest level this year. The same is true for the Awesome Oscillator. Therefore, it seems like bears have momentum. As such, the stock will likely continue falling as sellers target the next key support at 180p.