- Marks & Spencer reported better-than-expected Christmas trading; group revenue up 9.9%
- MKS Shares up 40% in past two months; nearing 150p psychological level
- Watch to buy on consolidation
Marks & Spencer is a venerable name in the UK corporate scene. So successful was the partnership between Michael Marks and Thomas Spencer more than a century ago that the retailer is still standing in 2023. The retailer is entrenched in the daily lives of the people in the UK. Thousands of shoppers pass through ‘Marks & Sparks’ stores every week.
But as a stock M&S’s returns have been wholly disappointing over the past three decades.
Is M&S a good investment in the long term?
As you can see from M&S’s long-term chart below, its overall trend is simply dismal. Prices are now lower than the lows established during the 2008 global financial crisis. If we measure the stock’s drawdown (peak-to-bottom in percentage change), the figure is even worse. At 150p, Marks & Spencer share prices are 75 percent below its 1997 peak of 600p! It begs the interesting question: Is MKS a long-term buy?
Cheerleaders of the stock will point out that M&S is more likely to survive the next few decades as it has done so since 1880s. For one, its brand is strong. Thousands of loyal customers up and down the country shop in ‘Marks and Sparks’ food stores every week. Internationally many shoppers still remember the retailer from its ‘St Michael’ brand. And the company is moving in the right direction, ie, internet-based partnership with Ocado and using ‘omni channels’ to deliver products to customers.
In the latest RNS, the company’s food division did well. “M&S Food outperformed the market on volume and value in the critical four-week Christmas period for the second year running and reached its highest ever recorded market share.“
And today (Jan 23), the company announced it is investing £480 million in creating 20 physical large stores (creating 3400 jobs costing). Clearly M&S is on the offensive not just playing defensive.
In other words, the company, despite its disastrous share prices, remain a viable investment proposition.
However, there are many negative points too.
- M&S is an age-old retailer struggling to perform in a ‘modern’ age. Growth is hard to come-by; as are profits.
- The younger generations are turning elsewhere. Meanwhile, M&S is just starting to harness internet-based shopping whereas other retailers are moving ahead already. Large investments needed to enhance its business.
Why would anyone invest in a company that needs to spend big just to stand still? There are many other stocks out there that have growth potential at a cheaper price, like tech stocks.
Think about this. Ocado (LSE:OCDO) is now valued at £6.3 billion despite an ongoing severe bear trend in its stock. As for M&S – a mere £2.9 billion, half the size of Ocado. Why is the market preferring Ocado to M&S? Growth.
Therefore, M&S may appear to be an interesting ‘value stock’ to pick for one’s long-term portfolio but investors have to guard against a further deterioration of the UK consumer spending power. The stock is trying to form a ‘base pattern’ that may take years to complete. If I were to start a fresh position here I would not overweight the retailer too much at current prices.
The best time to buy M&S shares is when the whole market is very weak. One example was last October when macro concerns punished many stocks regardless of their fundamentals.
M&S has had two major bear markets since 2007. The first was back in 2008 when prices dropped from 600p to 200p. The other was 2015-2020, where the stock suffered a 80 percent drop from its 550p high. After each prolonged decline prices rose by 100 percent from the lows.
M&S just had a 12-month-long 60% decline from 250p. A rebound is now underway. A consolidation is not to be ruled out.
For long-term investors, a drop into double-digit levels would be interesting and may be worth buying into – as that puts MKS in a ‘deep value’ territory.
Investors have punished Marks & Spencer’s share price over the past year due to the cost-of-living crisis. The market anticipated that the tougher macro environment, recession even, will reduce consumer spending.
- Expert guide – How to invest in a recession
However, the market may be pricing in an overly negative scenario that is not justified by the price decline.
In its November trading update, the retailer anticipates profits to be north of £200 million (see below). This figure was reaffirmed by the January trading update. That said, MKS’s free cash flow is expected to be negative and may soak up some of these profits.
As to the question if M&S is overvalued or undervalued, in these turbulent times, the company can swing from overvaluation to undervaluation in a matter of months. At £2.8 billion in market cap, that figure sounds about right – although a 30% swing in valuation may happen in a blink of an eye.
Source: Marks & Spence plc
Despite a shakey long-term case for the UK retailer, Marks & Spencer’s share prices have performed better than expected in recent weeks. Prices are up nearly 45 percent from its October lows. There are a few reasons for this:
- New top-down direction – as the new PM Sunak steadied the ship after ditching the disaster ‘Mini Budget’
- Better-than expected retail figures – as last week’s figure attested, consumers are still spending in the last Christmas
- Technical rebound – as the general market rebounds from its oversold October lows.
Overall, I suspect M&S shares are now moving into near-term overbought and may be due for a consolidation.
Compared to a year ago, more analysts have put up pessimistic recommendations on the retailer.
For example, on Jan 2022 11 brokers issued ‘Underperform/Hold’ ratings. Now, this number has increased to 16. This means that the City is downgrading the spending power of the consumers and as a result the company will make less profits.
With regards to the price targets, of the 20 analysts who drew up a projected price point, the median level is 144p. This is fairly close to the current price.
After hitting City’s price target, will traders take profit? Maybe, but MKS’s near-term positive momentum may push prices into the 150p area before falling back.
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The current LON:MKS share price is 233.5p which is a change of -3.1 or -1.31% from the last closing price of 233.5 with 8,225,131 shares traded giving LON:MKS a market capitalisation of £4,605,112,685. The most recent daily high has been 239 and daily low 232.8. The LON:MKS share price 52 week high has been 245.9 and the 52 week low 91.56. Based on the most recent LON:MKS share price opening of 233.5, the current LON:MKS EPS (earnings per share) are 0.18 and the PE (price earnings ratio) is 13.07.
Pricing data automatically updates every 15 minutes
