Trade idea of the day turnaround Tesco to 244p

There is no denying that Tesco has had a rough ride over the past few years. The supermarket has dealt with accounting scandals, international expansion failure and a very public spat with Unilever to name just a few incidences.

What: 

There is no denying that Tesco has had a rough ride over the past few years. The supermarket has dealt with accounting scandals, international expansion failure and a very public spat with Unilever to name just a few incidences. 

Yet despite all its woes, Tesco has managed to hold onto its title of Britain’s top supermarket, fighting off stiff competition from Aldi & Lidl, albeit losing 4% of market share along the way.

However, brokers haven’t been quite so convinced about Tesco’s future. Only back in December 40% of brokers had Tesco firmly on their sell list. But in recent sessions we have started to see a changing tone towards Tesco. 

For example, Barclays reinstated overweight rating to Tesco, then today JP Morgan upgraded Tesco to buy from neutral, things are certainly looking up.

So, what has changed? Just last week Tesco completed its merger with wholesaler Bookers. This means that Tesco can now focus on the opportunities that have arisen from the merger, principally the bigger market that Tesco will now have access to. 

The supermarket will have more access to restaurants whilst synergies are expected to help shave £200 million off costs, boosting the bottom line. Furthermore, JP Morgan suggest that the Booker deal will see Tesco able to generate £4.4 billion of free cash flow and reduce its net debt by £2.2 billion by 2020.

Another prominent change occurred at the end of last year when Tesco reinstated its dividend, a sign cash flow is under control and a sign of positive things to come.

There are of course still headwinds for Tesco to face. These include tougher conditions for the UK consumer, who is experiencing a difficult climate of rising prices and falling wages in real terms. 

However, food is a necessity so, Tesco is likely to be shielded compared to other retailers on the high street.

How: 

Shares in Tesco are still half of what they were worth at their 2007 high. Today they are trading 3% higher at 216p, its highest level since December 2016. 

Looking at the daily chart, Tesco is trading firmly above its 50 sma, 100 sma and 200 sma whilst technical indicators point to a strong buy. Resistance can be seen in the region of 218. A meaningful move through this price, could see Tesco extend gains towards 244. On the down side strong support is seen at 200p.

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