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Marks and Spencer’s (LSE: MKS) share price remains 8% below its 22 April one-year high. To me, that suggests an additional 8% discount to the ‘fair value’ already evident back then.
This is particularly true as the H1 results released on 5 November looked very solid to me.
So, exactly how undervalued is the stock right now?
The post-cyberattack numbers
Back in April, the British retailing institution revealed it had been hit by a cyberattack. It added that this would have an impact of about £300m on its 2025/26 operating profit.
In the event, its recent H1 results showed operating profit of £251.4m, down from £413.1m in the same period last year. So, this was apparently better than expected.
However, excluding the £100m insurance payout it received for the attack, the loss would have been £311.2m. This was right in line with the original forecast.
Aside from that, the firm’s sales continued their strong upward trend, rising 22.1% year on year to £7.965bn.
Understandably, Marks and Spencer has tightened its security protocols since the breach. However, future security compromises remain a risk.
That said, analysts forecast the retailer’s earnings will rise by a robust 19.5% a year to end-2027.
And it is ultimately growth that powers any firm’s share price trajectory over time.
How undervalued is the stock?
In my experience, the biggest long-term gains often come from spotting the gap between what a stock costs and what it is really worth. Price is just what the market is willing to pay today. Value is what the business is actually worth based on its future potential.
I have found that all asset prices tend to move to their ‘fair value’ over time. The most reliable tool I have found for measuring this gap between price and value is the discounted cash flow (DCF) model.
It draws on analysts’ cash flow forecasts for a company to show where its shares should trade. The DCF highlights that Marks and Spencer shares are 41% undervalued at the current £3.84 price. That points to a fair value of £6.51.
Time to buy more at a knockdown price?
Since turning 50, I have focused more on high-yield stocks. This is because I increasingly want to live off that income while continuing to reduce my weekly working commitments.
However, Marks and Spencer is one of the very few stocks that I have since bought solely for growth. After all, its current dividend yield of 0.9% is way off the 7% I look for from my dividend shares.
There are three key reasons why I bought them. First, after its shock (to it, not to me) demotion to the FTSE 250 in 2019, it reverted to its original business ethos. That is, simply, to provide good quality at a fair price. It was subsequently promoted back to the FTSE 100 in 2023.
Second, this has seen a huge turnaround in earnings growth, and the forecasts look very strong.
And third, this should drive its share price (and dividends) much higher in the coming years.
As all these reasons remain intact, I will buy more of the shares shortly.
I am also watching some other potentially stunning growth stock opportunities right now.
