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FTSE 100 UK retailer Marks and Spencer (LSE: MKS) has already come a long way since its 2019 demotion to the FTSE 250.
Back in the top-tier index since September 2023, its shares are up 59% from their 4 March 12-month traded high of £2.29.
That said, its gains in the past 12 months do not mean there is no value left in the stock. In fact, according to other analysts’ figures and my own, the shares still look full of value and are worth considering, I feel.
How much value is there?
My first step in ascertaining how much value remains in the stock is comparing its key valuations to those of its competitors.
Beginning with the price-to-earnings ratio (P/E), Marks and Spencer now trades at 18.6. This compares to the average P/E of its competitors of 32.5. So, it is cheap on this measurement.
This is true on the price-to-book ratio as well, with the firm trading at 2.8 against a competitor group average of 5.2.
The third of the major stock valuation ratios I use most – price-to-sales (P/S) – shows the same thing. Marks and Spencer currently trades at a P/S of just 0.6 against its competitors’ 5.2 average.
To work out what this means in share price terms, I ran a discounted cash flow analysis. Using other analysts’ figures and my own, this shows the stock is 39% undervalued at its present price of £3.64.
So a fair value for the shares would be £5.97, although market unpredictability might move them lower or higher. This looks like a bargain to me.
Does the business look set for growth?
Growth in earnings drives a firm’s share price and dividend over time. And in Marks and Spencer’s case, analysts forecast that its earnings will increase 8.5% a year to end-2026.
A risk here is the high degree of competition in its key Food and Clothing & Home businesses. This may squeeze its profit margins.
However, its results since it returned to the FTSE 100 have been impressive. For its fiscal year ending 30 March 2024, profit before tax (PBT) and adjusting items soared 58% year on year to £716.4m.
Its half-year results issued on 6 November showed a 17.2% jump in PBT and adjusting items year on year — to £407.8m.
Overall, both its Food and Clothing operations have increased their market share for four consecutive years.
Will I buy the stock?
I sold my shares in the company long before it was demoted to the FTSE 250 because I thought the strategy it was using to attract a younger clientele would not work. I also thought it would lose much of its appeal to its core longstanding customers.
However, the business now appears to have refocused again on providing good quality at a fair price.
As such, I have suggested the stock to my son as he begins his investment journey in his early 20s. To me it looks too much of a bargain for him to miss out on.
I focus on shares that pay high yields at my point in the investment cycle. Marks and Spencer shares do not provide this yet. But I think they will in the future as earnings growth drives its dividend and share price higher.
