Interactive Investor

M&S year-long rally tipped to continue much longer

The iconic high street retailer has more than doubled in value since October 2022, but the shares are still cheap, argues one City expert, suggesting the turnaround story is not finished.

3rd October 2023 13:50

by Graeme Evans from interactive investor

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The Marks & Spencer Group (LSE:MKS) turnaround story continues to win new City followers after analysts at a leading bank swung behind the retailer with an upgraded £3 price target.

Despite this year’s outperformance, Bank of America points out that M&S continues to screen as one of the cheapest stocks in its coverage across several valuation metrics.

In its note published at the end of last week, the bank upgraded its recommendation from Neutral to Buy and highlighted the potential for upward earnings revisions.

The bank’s new price target of 300p is up from 197p previously and compares with 229p seen today after a rise of 80% so far this year.

M&S TradingView chart

Source: TradingView. Past performance is not a guide to future performance.

A market valuation of £4.5 billion recently returned M&S to the FTSE 100 index alongside fellow high street bellwether Next (LSE:NXT). During its four-year exile, M&S was briefly overtaken in value by fast fashion chain Boohoo Group (LSE:BOO), but today the AIM-listed chain is worth less than £400 million after forecasting a big fall in revenues in interim results.

Despite the progress, M&S loyalists among the 100,000 or so retail investors will recall being above 500p in 2015 and sharing a dividend pot worth £375 million the following year.

Distributions have been at zero since the start of the pandemic, but a much-improved operating performance and strengthened balance sheet mean the group is planning a modest annual dividend starting with November’s interim results.

Bank of America is looking for a total payment of 8p a share across the 2024 financial year, giving a potential yield broadly in line with retail peers at around 4%.

On earnings per share, its forecasts for 2024-27 sit 5% above the consensus due to its significantly higher margin expectations in Clothing and Home (C&H).

The bank believes this is the key under-appreciated part of the M&S turnaround story as it backed the division to deliver on its 10% margin goal.

Near-term, the improvement should be underpinned by the reversal of cyclical headwinds such as freight costs before online efficiencies benefit medium-term profitability.

In Food, the bank said M&S’s performance has inflected from the lows reached in 2021 and that ambitions to gain share seem to be tracking ahead of expectations. According to Kantar, the company’s market share in the UK is 30 basis points ahead of 2019.

The note is also encouraged by signs of improvement in the UK consumer backdrop, which should support consumption and sentiment for consumer discretionary stocks.

The bank said: “Real wage and disposable income growth has inflected, and consumer confidence is recovering. This could be further supported by the recent pivot in UK interest rate expectations. A softening labour market and elevated mortgage rates remain key risks, however.”

The bank’s analysis points out that M&S trades on 10 times forecast 2025 earnings, which compares with a price/earnings (P/E) multiple for peers of 12 times.

It said: “If we apply peer multiples to M&S Food, current shares imply an 8x 2025 P/E for the C&H business – too low in our opinion considering market share gains and better brand heat.”

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