What are the long-term prospects for Marks & Spencer Group plc (LON:MKS)?
I'm always searching for shares that can help ordinary investors like you make money from the stock market.
Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.
I hope to pinpoint the very best buying opportunities in today's uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!
I'm assessing every share on five different measures. Here's what I'm looking for in each company:
1. Financial strength: low levels of debt and other liabilities;
2. Profitability: consistent earnings and high profit margins;
3. Management: competent executives creating shareholder value;
4. Long-term prospects: a solid competitive position and respectable growth prospects, and;
5. Valuation: an under-rated share price.
A look at Marks & Spencer
Today I'm evaluating Marks & Spencer (LSE: MKS), a UK retailer that sells clothing, food and home products, which currently trades at 370p. Here are my thoughts:
1. Financial strength: M&S is in solid financial position, with a ratio of net debt-to-EBITDA of 2 and a more-than-adequate interest cover of 9 times. Free cash flow generation has been very good the last five years, averaging around £440m per year.
2. Profitability: Looking at the past 10 years, Marks & Spencer has had decent results, compounding revenues and earnings per share by 7% and 5%, respectively, and increasing dividends by 5% per year. It enjoyed a brief revival during the latter part of the last decade reaching over £1bn in pre-tax profits in 2008. However, profits have slumped ever since even though revenues continued to grow, as operating margin had declined from 13% in 2008 to 8.2% in 2012. The 10-year average return on equity (ROE) has been good at 18%, which was partly bolstered by the company buying back shares while taking on debt from 2004 to 2008. ROE has declined from 37% in 2008 to 19% in 2012.
3. Management: The jury is still out on CEO Marc Bolland, who replaced Sir Stuart Rose on May 2010. He came to M&S with great credentials, as chief executive of Morrisons supermarkets since 2006, he has been credited for the supermarket chain's resurgence. However, nearly three years into his reign, M&S' general merchandise business, especially the important clothing line, continues to be in decline.
4. Long-term prospects: M&S' food business continues to be solid, growing by 4% annually, and multi-channel sales are enjoying robust growth, increasing 24% per year the last three years. However, like-for-like sales of general merchandise, primarily clothing, have been on the decline in seven out of the last eight quarters. Quite alarming considering that over 40% of the company's revenues come from this segment. Despite the poor results, management has stated the company is set for long-term growth as its three-year programme, launched in 2010 with the goal of becoming a "truly international, multi-channel retailer", is going as planned. This included increasing capital expenditure by £900m over the next three years to rebrand products, revamp stores, improve its online presence and increase its international capabilities.
M&S' shares are currently trading below 50% of its 2007 high and just around 20% above its 2003 price levels. With a forward price-to-earnings (P/E) ratio of 11 and a price-to-sales (P/S) ratio of 0.59, it looks cheap compared to its historical averages.
My verdict on Marks & Spencer
M&S remains a good company, in solid financial health, with a history of growing revenues, earnings, cash flow and dividends. It trades at a price below its historical multiples, while returning an above-average yield of 5%, twice covered. However, business conditions remain difficult for UK retailers in general since recession hit in 2009 and competition has only intensified as companies compete for consumers limited disposable incomes. While parts of its business remain strong, it seems the critical clothing business is fading. While rivals such as Primark, Next and Debenhams continue to improve its offerings each year, M&S has struggled to find its niche.
So overall, I believe at 370p it looks like a hold.
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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
> Zarr does not own any shares mentioned in this article.