Should Tesco shares be in my ISA shopping basket?

With the annual ISA contribution deadline just around the corner, I have been thinking about what shares I would like to have. One of the names that comes up frequently is Tesco (LSE: TSCO). There are many characteristics I look for when buying shares, from strong competitive advantage to proven cash generation power. Could now be the time for me to buy Tesco shares?

Tesco’s strong business model

I think the main attraction here is the dominance of the business area, I expect to see sustained demand. People always need to buy groceries, even when the economy is weak and household budgets are tight.

Tesco is the UK’s largest retailer. But for a long time it has also been a big operation overseas. It has turned many people away. Last year, Tesco’s retail business in the UK and Republic of Ireland returned around 13 times more than its remaining Central European operations. By withdrawing from international markets and mostly focusing on the heart of England, Tesco can now play to its strengths.

Tesco’s brand and loyalty programs help attract and retain customers. Over 20m households have one Clubcard. But one risk that all supermarket chains face is increased competition from digital rivals. This can lead to smaller profit margins across the industry.

On the other hand, this could also be an opportunity for Tesco to develop and develop a more comprehensive relationship with existing customers. One Clubcard Plus The program has been similar to wildly successful Amazon Prime. The Tesco app has 9 million regular users.

Challenging pricing environment

I count the strong position of the retailer and the Clubcard program help give a clear competitive advantage. However, it faces risks that could affect the future value of Tesco shares.

What matters is the intense competition in retail. German chains Aldi and Lidl look set to continue to grow for years to come. Discounts such as B&M it has also peeled some shoppers away from the supermarket giant. Price has been a key driver for this and Tesco’s response has included matching certain prices from Aldi. That may help retain customers but may result in lower profit margins.

Last year, Tesco’s net profit was 2.5%. The previous decade had been 4.4%. That means profit margins contracted by more than 40% over a decade.

With today’s struggling economy, pricing remains a sensitive issue for many customers.

Stock price evaluation

Although Tesco looks like a very good business, does it have the sort of attractive value that will make me want to buy it for my ISA?

At the moment, it is not. Tesco shares trade at a price-to-earnings ratio of 21. That seems expensive to me for a mature business I see as having limited long-term growth prospects (Tesco’s revenue has fallen over the past decade).

So, for now, I won’t buy it.