Ever since I first started writing about Marks & Spencer (LSE: MKS), it seems as if the company has been in a perpetual state of restructuring. Management is always coming up with some scheme to try and improve sales and cut costs, but none of these efforts have worked (so far).
Indeed, over the past six years, the retailer’s normalised earnings per share, which exclude the impacts of one-off costs such as restructuring charges, have increased by just 4p, from 35p to 39p.
Performance on the top line hasn’t been much better. For 2013, the group reported revenues of £10bn. Analysts have pencilled in sales of £10.4bn for fiscal 2019, an increase of £400m, or less than 1% per annum.
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Standing still
The City doesn’t expect Marks’ outlook to improve anytime soon. Analysts have pencilled in a net profit of £403m for fiscal 2019, around 10% less than the figure reported for 2013, which seems to confirm my suspicion that the retailer’s growth days are now behind it.
Recent speculation that M&S might be pursuing a tie-up with online delivery giant Ocado, isn’t enough to change my views on the business.
Marks has carved out a niche for itself in the grocery market, but the core business, clothing, is really struggling and I just don’t see growth improving here anytime soon. Efforts to make a brand more appealing to a younger demographic seem to have only have alienated the brand’s most loyal customers. Meanwhile, online fast fashion houses such as Asos and Boohoo are proving to be relentless in their quest to take over the UK clothing market.
Full valuation
Having said all of the above, I’m not predicting the demise of the business anytime soon — more than £10bn in annual sales is still enough to make M&S one of the UK’s top retailers. However, as an investment, I think investors should probably stay away.
A dividend yield of 6.5% might look attractive but, in my view, the stock is fully valued trading at 11.8 times forward earnings. With no return to growth on the horizon, I’m struggling to see any upside for the shares at the current valuation.
Overvalued
Another overvalued business that I’m staying away from it is outsourcing group Serco (LSE: SRP), which is expected to return to growth in 2019 after four years of restructuring.
After flirting with bankruptcy in 2015, management has been working flat-out ever since to put the business back on a stable footing, win contracts, and return to growth.
So far, everything seems to be going to plan. The City is expecting Serco to report a net profit of £54m in 2018, the first full year profits since 2013. And 2019 is also expected to be another profitable year. A £560m contract with Bupa to help provide medical services to the Commonwealth of Australia’s Department of Defence — announced today — will help profits grow.
Nevertheless, despite Serco’s improving outlook, I’m not a buyer. Looking at it right now, I think the stock’s biggest problem is its valuation. It’s trading at a forward P/E of 19.9, which seems vastly over-optimistic. At this level, even a slight reduction in earnings expectations could lead to a substantial decline in the share price. Considering the company’s history, I’m not willing to take that risk.
