Tesco, the UK's largest supermarket chain, continued to attract positive broker reaction on Friday, a day after interim results highlighted the growing contribution of higher-margin income streams alongside its core grocery business.
Deutsche Bank raised its price target on the FTSE 100 retailer from 525p to 550p and reiterated its 'buy' rating, saying it viewed Tesco as "a best-in-class operator in UK grocery".
Analyst Benjamin Yokyong-Zoega pointed to the resilience of earnings despite subdued like-for-like (LFL) sales growth.
At the same time, profit is increasingly being driven by a favourable sales mix, cost savings and ancillary revenues such as retail media, the fast-growing business of selling advertising space to suppliers.
Deutsche noted that the premium Finest range grew 8.9% in the period and said the profit improvement was not coming at the expense of competitiveness, with customer satisfaction at a record high.
The bank said Tesco's scale, strong balance sheet and value credentials left it well placed to outperform if the UK consumer weakens further.
The stock was trading on 14.8 times its calendar 2027 price-to-earnings ratio and a 6.4% free cash flow yield, Deutsche Bank said, implying around 10% upside to its new 550p target.
Jefferies also lifted its price target, moving from 480p to 500p, though the US investment bank maintained its more cautious 'hold' rating.
The Jefferies team highlighted what it called "outsized Whoosh sales growth" as a key driver of investor confidence.
Tesco's rapid delivery service grew 37% and is running at an annual rate of £500 million, equivalent to around 1% of total UK ex-fuel sales.
Jefferies noted the striking improvement in profit conversion from incremental sales, with £637 million of additional revenues in the first half generating £89 million in extra earnings before interest and tax (EBIT).
That's a contribution margin of 14%, compared with just 0.7% on the equivalent sales gain in the prior full year.
The bank attributed the improvement to non-food profit streams flowing more directly to the bottom line, alongside higher full-price sell-through of general merchandise and retail media income.
Jefferies lifted its full-year EBIT estimate by 1% and forecast free cash flow of £1.77 billion for the year, ahead of the consensus estimate of £1.72 billion.
Tesco shares were changing hands for 515p, up 3%.
