Which blue-chip retailer should you buy today?
In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.
In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.
Stepping into the ring today are retailers Marks and Spencer (LSE: MKS) and B&Q-owner Kingfisher (LSE: KGF).
The UK economy continues to struggle, consumers remain under the cosh, and the shares of M&S and Kingfisher have underperformed the FTSE 100 over the past six months.
The FTSE 100 is up 2% over the period. M&S's shares, despite having been bolstered by talk of a private-equity bid for the company, are only up 1%, while Kingfisher's shares have fallen 12%.
Let's take our seats at ringside.
Round 1: earnings
| | M&S | Kingfisher |
|---|
| Recent share price | 369p | 269p |
| Last year price-to-earnings (P/E) ratio | 10.6 | 10.7 |
| Current-year forecast P/E | 11.0 | 11.7 |
| Four-year earnings per share (eps) compound annual growth rate (CAGR) (%) | -5 | 24 |
| Current year forecast eps growth (%) | -4 | -8 |
| Operating margin (%) | 7.5 | 7.2 |
Sources: Digital Look, Morningstar, company reports. Winners in bold.
M&S starts strongly, taking four points to Kingfisher's one. Kingfisher's one point, for vastly superior historic eps growth, tells of its strong bounce back from the 2008-09 recession. Both firms are expected to see negative eps growth in the current year, with a record wet summer being behind Kingfisher's forecast reversal.
Round 2: dividends
| | M&S | Kingfisher |
|---|
| Last year dividend yield (%) | 4.6 | 3.3 |
| Current-year forecast dividend yield (%) | 4.7 | 3.5 |
| Four-year dividend CAGR (%) | -7 | 5 |
| Current year forecast dividend growth (%) | 2 | 6 |
| Forecast dividend cover | 1.9 | 2.5 |
Sources: Digital Look, Morningstar, company reports. Winners in bold.
M&S starts round two strongly taking points for its superior dividend yield. However, Kingfisher fights back with stronger growth numbers and snatches the round on better dividend cover.
Round 3: balance sheet
| | M&S | Kingfisher |
|---|
| Price-to-book (P/B) ratio | 2.7 | 1.9 |
| Net gearing (%) | 75 | 3 |
Sources: Digital Look, Morningstar, company reports. Winners in bold.
Kingfisher finishes the contest strongly, taking both points in the final round, giving the B&Q owner a two rounds-to-one victory over M&S. However, the companies are all square when it comes to the overall points tally, which is six points apiece.
Post-match assessment
There were some big swings round-to-round in this contest, with the companies each winning one round very convincingly, sandwiching one close-fought round. Nevertheless, at the end of the day, M&S and Kingfisher proved to be equally matched.
It's worth noting, though, that while Kingfisher was generally stronger on fundamentals -- such as earnings and dividend growth -- M&S took four of the five valuation-ratio points, suggesting the high-street stalwart might just be better value than Kingfisher at the present time.
Investing is by no means easy in today's uncertain world. Some sectors offer investors better opportunities than others, which is why The Motley Fool has published a special free report, “Top Sectors Of 2012”. Our top analysts not only identify three favourable industries for 2012 and beyond, but also pinpoint one great company in each sector.
If you would like “Top Sectors Of 2012” dispatched immediately to your inbox, simply click here.
Are you looking to profit as a long-term investor? “10 Steps To Making A Million In The Market” is the Motley Fool's guide to help Britain invest. Better. We urge you to read the report today – while it's still free and available.
Further investment opportunities:
> G A Chester does not own shares in any of the companies mentioned in this article.
