Why I’m staying away from the Marks and Spencer share price

The Marks and Spencer Group plc (LON: MKS) share price could have further to fall, argues Rupert Hargreaves.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »