M&S shares plummeted almost 20% after a downbeat trading statement. For contrary thinkers the share isn't far off from being a buy.
News of a more than 2% fall in like-for-like UK sales over the Christmas period hammered Marks & Spencer's
(LSE: MKS)
stock this morning.
Shares in the benchmark British store chain plummeted almost 20% in early trading after the company admitted that revenues in 2007's fourth quarter were worse than expected.
And the future's looking no better on the retailer's radar screen, with the board forecasting a ‘tough' 2008.
All of which poses the big question for contrarian investors...
...at 400p a shot, is Marks now a buy?
In the good old days, the City used to describe as ICI as ‘the market bellweather'. Times change, and now the remains of the old Imperial Chemical Industries are part of the world's largest coatings manufacturer Akzo Nobel.
But in retailing, Marks & Spencer has always featured amongst the elite. Even after today's precipitate decline in its market worth, M&S still constitutes over a quarter of the value of the FT 350 General Retail index.
So it's hardly surprising that a few shock waves have been created by the company's report that for the 13 weeks to December 29, despite an overall group turnover rise of 2.8%, top-line like-for-like sales in Britain have dropped by 2.2%. Particularly as ‘same store' non-food turnover fell by over 3%. Even food sales shed 1.5% on a comparable basis.
Sadly, the 78% leap in online transactions and the 15% jump in international revenues have proved to be of scant consolation.
Tough going...
The retail scene became ‘more challenging' through November and December, according to Marks' management, as volume growth of 5% in general merchandise was more than offset by price cuts despite the company's refusal to post discounts in the Christmas run up.
Although the Sale began well, and there are the usual upbeat noises about the upgrade programme - 70% of stores have now been revamped and new space is due to be added - the company's expectation of a difficult 2008 will be dominating analysts' thoughts.
Red pencils will be sharpened. Profit forecasts for this year, and next, are likely to be slashed. But today's share price plunge is still dramatic. Marks' stock had earlier slid from over 650p just six months ago to 500p even before today's unwelcome news.
..but getting cheap
Yet even if earnings estimates for the current period to March 2008 and also for the following year are both chopped by 25%, M&S would still be selling on a price to earnings ratio (PER) of under 11 times next year's net profits. And unless the dividend is cut - possible for all retailers at the moment but less likely in Marks' case than most - the historic yield is now 4.5%.
Hardly expensive for one of Britain's top retailers.
Yes, there's likely to be further blood on the high street. New surveys from both the British Retail Consortium and the Nationwide confirm the gloomy backdrop.
But I'm prepared to stick my neck out. Though still bearish about the overall UK market, I'm believe the sell-off has dragged Marks' stock price down towards interesting levels.
Corporate activity is likely to kick in soon if store market valuations keep on suffering. Retail's Big Cahuna Philip Green was happy to fork out 400p per shot in his 2004 takeover bid for M&S. If the shares fall much below this price in the near future, I'm betting on a bounce.
STOP PRESS...3.18 pm: M&S Chief Exec Stuart Rose has just bought 250,000 shares at just over 410p. Perhaps he's read the article...
