Three Reasons To Sell Marks and Spencer Group Plc Today

Any potential recovery has already been priced into Marks and Spencer Group Plc (LON:MKS), says Roland Head.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Last year’s declining clothing sales at Marks & Spencer Group (LSE: MKS) (NASDAQOTH: MAKSY.US) led to the firm’s decision rejuvenate its ‘general merchandise’ division with a new management team led by ex-Debenhams chief Belinda Earl.

Long lead times mean that the autumn/winter collection that is currently in the shops is the first chance the British public has had to see the work of Ms Earl, and expectations are high; will M&S manage to restart growth in its core business of clothing sales?

Valuation is ahead of results

I’m probably not the best person to judge whether the new ranges now appearing in my local M&S will be successful, but luckily, as a Foolish investor, I have a more reliable source of information — the company’s financials.

Here, the message is unmistakeable: any realistic turnaround is already priced into M&S’s stock price.

Over the last year, Marks & Spencer’s share price has risen by 29%, beating the FTSE 100’s 11% rise. Anyone who purchased M&S shares when they really did look cheap, at the start of 2012, will now be sitting on a gain of more than 50%, which has left the firm’s shares trading on a trailing P/E of 16.6, thanks to falling earnings.

Unappealing financials

Marks & Spencer’s operating profit has fallen by 10% since 2011, and its dividend has been unchanged for the last two years. The firm’s rising share price means its previously attractive yield has now fallen to 3.5%, which is only slightly above the FTSE average of 3.1%.

I’m also not keen on Marks & Spencer’s rising net debt, which is now in excess of £2bn, giving the firm net gearing of 83%. The cost of servicing this debt is rising, and M&S spent £218m on finance costs last year, which accounted for nearly 30% of its operating profit.

Unrealistic expectations?

If Marks & Spencer scores a hit with its new ranges this autumn and they mark the start of a turnaround in the firm’s clothing sales, any resulting growth will be slow and steady, not rapid.

Marks & Spencer’s current valuation and recent financials suggest to me that any such growth is already priced into the shares. However, if sales disappoint, and the firm’s cash flow continues to be squeezed by debt, store upgrades and dividend payments, then I think that the shares could fall back to the levels seen earlier this year.

An alternative to M&S

If you’ve already taken the plunge and sold your Marks & Spencer stock, you may be looking for high-quality blue chip companies that currently look cheap.

Buying such companies has worked well for top UK fund manager Neil Woodford. If you’d invested £10,000 into Mr Woodford’s High Income fund in 1988, it would have been worth £193,000 at the end of 2012 — a 1,830% increase!

If you’d like access to an exclusive Fool report about Neil Woodford’s eight largest holdings, then I recommend you click here to download this free report, while it’s still available.

> Roland does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Debenhams.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

£10,000 invested in Greggs shares 10 years ago is now worth…

Greggs' shares have reversed sharply due to recent trading pressures. Is this a great dip-buying opportunity for long-term investors to…

Read more »

Investing Articles

Up 40% in a year and still yielding 7.5% with a P/E of 8.5! Could this be the best share for me to buy today?

Harvey Jones is impressed by results at British American Tobacco. He thinks it might be the best share to consider…

Read more »

Investing Articles

7% yields and P/Es below 12! Yet I wouldn’t touch these 2 income shares with a bargepole!

Harvey Jones has been tempted by two FTSE 100 income shares that look good value and offer dizzyingly high dividend…

Read more »

British bank notes and coins
Investing Articles

£10 a day of passive income from a £20k Stocks and Shares ISA? Here’s how!

Christopher Ruane walks through some steps an investor could use to target a tenner a day of income from a…

Read more »

Investing Articles

Here’s how scooping up cheap FTSE 100 shares now could help an investor retire early

This writer sees stock market tumbles as an opportunity for the savvy investor to try and bring forward their retirement.…

Read more »

Investing Articles

Are Rolls-Royce shares still a bargain in 2025?

Rolls-Royce shares have been on an incredible run in recent years. Christopher Ruane considers whether he ought to add some…

Read more »

Investing Articles

£10K of savings? Here’s how an investor could use that to target a £2,708 second income

The stock market can be a powerful and simple way to build a second income. Our writer illustrates how someone…

Read more »

Investing Articles

£20,000 in savings? Here’s how it could potentially unlock £888 of passive income each month

Christopher Ruane explains why owning dividend shares can be an appealing passive income idea -- and how it can work…

Read more »