M&S' shares rise sharply on better than expected trading news. Is now the time to buy?
Well, it was relatively good news from M&S today. It's often said that all that matters in investment is surprise; if something is expected, it will be factored into the price already. This morning Marks and Spencer (LSE: MKS) surprised the markets with a trading update that would in the past have been considered weak, but was considerably better than most people anticipated.
Mr Market was braced for a decline of 7% in sales for the thirteen weeks to the end of March, on a like-for-like basis (i.e. adjusting for the effects of new and discontinued stores). Instead, Chairman and CEO Sir Stuart Rose announced a fall of just 4.2%, or 3.5% if we adjust for the fact that Easter fell in first quarter last year.
Analysts expected food sales to be down by between 5.8% and 6.5%, but the company managed to limit that fall to just 3.8%, or 3.1% considering the Easter effect, and there was similar good news in general merchandise.
While margins will be about 1.75 percentage points lower than last year, this is in line with previous guidance, so the better than expected sales were not achieved at the expense of gross profit. Capital expenditure is also in line with earlier reports.
As investors reacted to the news, the shares jumped 11% this morning to 295p, a price not seen since last August. But are they worth it?
At this price, it's on an historical dividend yield of 7.6%, which is very desirable, or at least it would be if dividend payments were maintained at last year's level. The board is doubtless well aware of the importance of dividends to many of its shareholders, institutional and private, but it is far from certain that this payout can be continued. Consensus estimates, for what they're worth, show an expected cut of about 33% for the year, with some analysts expecting it to be halved. We'll have the answer when results are announced on 19 May.
And despite the positive results this morning, I don't think we should get too far ahead of ourselves as far as economic recovery is concerned. “The outlook remains uncertain”, according to Rose, and who could argue with that.
Marks and Spencer is an excellent brand, but if I wanted to buy a retailer, which I at the moment I don't, I'd be more inclined to go for something like Tesco (LSE: TSCO) -- it's on a lower price/earnings ratio for the coming year, and I'd expect it to be more resilient if the recession really starts to bite.
If you're ready to go shopping for retail shares, you can trade for as little as £10 with The Motley Fool Share Dealing Service. It’s absolutely free to open an account.
