As I type on Thursday (11 January), the Marks and Spencer (LSE: MKS) share price is down around 5% since the market opened.
So what terrible news from the retailer was in this morning’s Christmas trading update? Brace yourselves. It’s as bad as this: the total UK like-for-like sales figure for the 13 weeks to 30 December came in just over 8% higher!
Good news was likely in the price
That’s a win, then. However, the share price action on the day suggests the wisdom in the old adage that it’s often better to travel than to arrive.
Indeed, good news was anticipated by many. After all, the company’s successful turnaround and growth efforts have been appreciated by investors for some time. We can see that from the up-trending share price.
The move upwards has been particularly strong since November’s bullish half-year report. So heading towards the Christmas update, it seems likely that investors’ expectations might have raced too far ahead.
If that’s the case, a little froth being blown from the valuation now presents us with an opportunity to re-evaluate and dig in with further research. Maybe now is a good time to consider the stock for a longer-term holding period.
Chief executive Stuart Machin is balanced in his views about the outlook. Looking ahead for a year or so, he said expectations for general economic growth are still uncertain. On top of that, the business anticipates cost increases from wage inflation and higher business rates.
Nevertheless, Machin reckons the company’s “strong” Christmas trading performance provides “confidence” that full-year results will meet market expectations.
The company’s trading year runs to the end of March. City analysts expect normalised earnings to come in just over 40% higher than the previous year. So Machin’s confirmation that the target will likely be hit justifies much of the strong share price action we’ve seen since October 2022.
Steady growth ahead?
The big question is, can such outperformance continue? Analysts don’t expect such a big rise in earnings next year. However, they have pencilled in a further uplift of just over 10%.
That seems realistic to me. It’s the kind of growth that could be sustainable for later periods as well. Meanwhile, with the share price near 262p, the forward-looking earnings multiple is just below 11. That looks like a fair valuation for a business that has been performing so well.
There are risks for shareholders, of course. All businesses can face setbacks from time to time. With Marks and Spencer, I see the biggest challenge as being its sensitivity to the ups and downs of the wider economy.
Nevertheless, the firm’s strategy to reshape the business has been working and there’s a clear focus on driving future growth and profitability.
I think M&S is well worth investors’ research time right now with a view to holding some of the shares for the long haul.
