Despite an impressive recent run, a well-established brand, and solid customer base, I reckon Marks and Spencer (LSE: MKS) could be one of a number of under-the-radar value stocks on the FTSE index.
Let me explain how I’ve come to this conclusion, and why I’d be willing to snap up some cheap shares as soon as I’m able to.
Marks and Spencer’s shares on the up
The retail giant doesn’t really need much of an introduction, in my eyes. I must admit I’m a frequent customer, along with my family. I’m often in the womenswear, kids, and home sections, while my husband is searching for delectable delights in the quite lovely food section.
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Two things struck me when I looked at Marks and Spencer shares. Firstly, they’ve been on an excellent run in the past 12 months, against the back drop of economic uncertainty, including high inflation. They’re up 54% in this period, from 188p at this time last year, to current levels of 290p.
Next, despite the great run, the shares still looks great value for money to me. I’d say they’re in the value stock category at the moment.
The investment case
Diving straight into the valuation, the shares trade on a price-to-earnings ratio of just 12. This is pretty attractive considering the size, brand power, reach, and current momentum of the business. I was honestly expecting a much loftier valuation based on the factors mentioned.
Next, Marks and Spencer’s final results for the year ended 30 March made for great reading. A few highlights for me were that revenue, sales, operating profit before tax, and earnings per share all increased compared to the previous year. Plus, net debt had come down, which is always pleasing to see.
The business has been on a mission to transform itself, including heavy investment into digital channels and e-commerce. Plus, it has closed down some, and modernized other stores, to ensure its retail outlets are supporting growth and better performance.
Finally, a dividend yield of 1% isn’t the highest, but could grow to help me create a passive income stream. However, I do understand that dividends are never guaranteed.
Risks and final thoughts
A couple of issues worry me, as they could hurt Marks and Spencer’s earnings and returns.
Firstly, competition in the retail sector is intense across all fronts. For example, from the food perspective, more traditional supermarkets such as Tesco, Sainsburys, and even new kids on the block, Aldi and Lidl, are seen as day-to-day alternatives. Marks and Spencer is seen as a premium brand, with the price tag to match.
The other worry is continued economic factors, such as inflation. Higher costs tend to mean higher prices, and customers looking for cheaper alternatives. If Marks and Spencer doesn’t increase prices, then margins could be tighter.
Overall I’m a fan of Marks and Spencer shares. I don’t think the shares will be this cheap for too long if the business can continue its current momentum.
