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British retailing institution Marks and Spencer (LSE: MKS) has seen its share price drop 19% since 22 April.
At that point, it had been riding high following a return to the core principle that had made it great in the first place. This was a focus on good quality at a fair price. Indeed, at that stage it was trading around £4.17 – a level not seen since May 2016.
The turning point came on 22 April, when it announced that it had been subject to a major cyberattack. It added that this would have an impact of around £300m on its fiscal year 2025/26 operating profit.
That said, it resumed its online ordering service on 10 June and its click and collect service on 11 August.
Consequently, with it fully back in business and new safeguards against cyber attacks in place, I think it looks an absolute bargain.
How does the underlying business look?
Before the cyberattack, Marks and Spencer had been posting one set of strong results after another.
Its H2 fiscal year 2024/25 results of 6 November showed profit before tax jump 17.22% year on year to £407.8m. Food sales rose 8.1%, while Clothing & Home sales increased 4.7%. Adjusted return on capital employed (ROCE) increased to 15% from 13.2%.
Meanwhile, its 21 May full fiscal year 2024/25 numbers saw a 22.2% year-on-year jump in profit before tax to £875.5m. This was the highest level in over 15 years. Food sales increased 8.7%, and Fashion, Home & Beauty sales rose by 3.5%. Adjusted ROCE rose again – to 16.4%.
A key risk for its profits is any additional increase in tax on the retail sector. This would compound the negative effects of the last Budget’s 1.2% increase in employers’ National Insurance.
That said, analysts forecast that Marks and Spencer’s profits will increase by a robust 19% a year to end fiscal-year 2027/28.
Is the share price undervalued?
I have found the best method of establishing whether a share is undervalued is through discounted cash flow (DCF) analysis.
This pinpoints where any firm’s stock price should trade, based on cash flow forecasts for the underlying business.
It also benefits from being a standalone valuation, unaffected by over- or undervaluations for the sector as a whole.
The DCF for Marks and Spencer shows its shares are 45% undervalued at their current £3.38 price.
Therefore, their fair value is £6.15.
Will I buy?
I think Marks and Spencer occupies a unique place in the British retail sector once again. I also believe that it will continue to do so for years to come, provided it sticks to its current strategy.
To me, the enormous underpricing of the shares to their fair value is no longer justified. The firm took a hit from a cyberattack, but it has dealt with it and quantified its effects.
The market seems not to have fully factored this into the share price. Consequently, the share price is still being penalised for a factor that no longer exists.
This makes it an even bigger bargain than it looked before to me. As such, given its huge undervaluation and very strong earnings growth prospects, I will buy the stock very shortly.
