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Marks and Spencer (LSE:MKS) shares are certainly interesting UK retail investors — it’s one of the most researched stocks. The shares have surged from their lows during the cost-of-living crisis, but didn’t offer much in the way of returns last year.
One reason for this was the cyberattack at Marks and Spencer that forced the suspension of online orders and disrupted in-store systems, hitting sales and increasing operating costs. Management warned of a material profit impact and ongoing remediation spending.
The stock is now down 20% from its highs, even after a positive trading update. So, is this a once-in-a-decade opportunity to consider it?
Valuation is particularly strong
Marks and Spencer is currently trading around 11.1 times forward earnings ( for the next 12 months). That puts it at a significant discount to its grocery peers, but it’s more expensive than where it was a couple of years ago.
For example, in July 2022, the stock was trading around 8.7 times forward earnings. It also had a sizeable 4.6% dividend yield versus 1.3% today. So where does my ‘once-in-a-decade’ idea come from?
The big differences between then and now are growth and debt.
Back then, net debt was greater than the market cap. Today, net debt is around 25% of the market cap. So, if we adjust the price-to-earnings (P/E) ratio for the net debt position, it’s actually cheaper today.
And then there’s growth. In 2022, analysts forecast a 20% fall in earnings for FY23 followed by a 4% increase in FY24.
But today, the forecast is for a 22.4% fall in FY26 (because of the cyberattack), followed by a 46.9% increase in FY27.
This also tells us that it’s cheaper on a growth-adjusted basis.
My point is, even though Marks and Spencer shares looked cheaper on face value in 2022, a very small amount of analysis tells us that this wasn’t the case based on forecast earnings and the balance sheet.
Operation momentum
Marks and Spencer left full-year guidance unchanged after “solid” Christmas trading, as 5.6% like-for-like food growth offset a 2.9% fall in clothing, home and other non-food categories. Group sales rose 3.3% excluding Ocado as the business said a record number of customers shopped with M&S this Christmas.
However, the investment thesis really isn’t about this year. It’s about FY27 when earnings normalise and grow.
Risks? Well, there are always risks. One ever-present one is the state of the economy and the enduring perception of M&S as a premium brand.
So, is this a once-in-a-decade opportunity to buy the shares? I actually believe it might be, but I can’t be sure. Purely on a valuation basis, I believe it would be hard to find the stock looking more attractive.
I’ve actually gone through lots of historical valuation sheets for the company, and the current position is the best I’ve seen.
With this in mind, I absolutely think the stock is worth considering.
