Why I’m staying away from the Marks and Spencer share price

The Marks and Spencer Group plc (LON: MKS) share price could have further to fall, argues Rupert Hargreaves.

| More on:

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.

Ever since I first started writing about Marks & Spencer (LSE: MKS), it seems as if the company has been in a perpetual state of restructuring. Management is always coming up with some scheme to try and improve sales and cut costs, but none of these efforts have worked (so far). 

Indeed, over the past six years, the retailer’s normalised earnings per share, which exclude the impacts of one-off costs such as restructuring charges, have increased by just 4p, from 35p to 39p. 

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Performance on the top line hasn’t been much better. For 2013, the group reported revenues of £10bn. Analysts have pencilled in sales of £10.4bn for fiscal 2019, an increase of £400m, or less than 1% per annum.

Standing still

The City doesn’t expect Marks’ outlook to improve anytime soon. Analysts have pencilled in a net profit of £403m for fiscal 2019, around 10% less than the figure reported for 2013, which seems to confirm my suspicion that the retailer’s growth days are now behind it.

Recent speculation that M&S might be pursuing a tie-up with online delivery giant Ocado, isn’t enough to change my views on the business. 

Marks has carved out a niche for itself in the grocery market, but the core business, clothing, is really struggling and I just don’t see growth improving here anytime soon. Efforts to make a brand more appealing to a younger demographic seem to have only have alienated the brand’s most loyal customers. Meanwhile, online fast fashion houses such as Asos and Boohoo are proving to be relentless in their quest to take over the UK clothing market.

Full valuation 

Having said all of the above, I’m not predicting the demise of the business anytime soon — more than £10bn in annual sales is still enough to make M&S one of the UK’s top retailers. However, as an investment, I think investors should probably stay away. 

A dividend yield of 6.5% might look attractive but, in my view, the stock is fully valued trading at 11.8 times forward earnings. With no return to growth on the horizon, I’m struggling to see any upside for the shares at the current valuation.

Overvalued 

Another overvalued business that I’m staying away from it is outsourcing group Serco (LSE: SRP), which is expected to return to growth in 2019 after four years of restructuring.

After flirting with bankruptcy in 2015, management has been working flat-out ever since to put the business back on a stable footing, win contracts, and return to growth.

So far, everything seems to be going to plan. The City is expecting Serco to report a net profit of £54m in 2018, the first full year profits since 2013. And 2019 is also expected to be another profitable year. A £560m contract with Bupa to help provide medical services to the Commonwealth of Australia’s Department of Defence — announced today — will help profits grow.

Nevertheless, despite Serco’s improving outlook, I’m not a buyer. Looking at it right now, I think the stock’s biggest problem is its valuation. It’s trading at a forward P/E of 19.9, which seems vastly over-optimistic. At this level, even a slight reduction in earnings expectations could lead to a substantial decline in the share price. Considering the company’s history, I’m not willing to take that risk.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

A beach at sunset where there is an inscription on the sand "Breathe Deeeply".
Investing Articles

Stock market crash: here’s why falling prices is good news

Over in the US, a stock market crash is battering high-priced stocks. But I see falling shares as an opportunity…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

These 5 FTSE 100 shares crashed in 2022. I’d buy 1 today

Although the FTSE 100 index is flat in 2022, some Footsie shares have crashed hard this year. But I see…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How investors can boost their passive income when the FTSE is falling

Stock markets are plagued with fears right now. Here's why I firmly believe those fears improve our passive income prospects.

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Investing Articles

2 cheap UK shares to buy right now!

Recent market volatility means many top stocks now trade at rock-bottom prices. Here are two cheap UK shares I'm thinking…

Read more »

Rolls-Royce's business aviation engine, the Pearl 700
Investing Articles

The Rolls-Royce share price is just pennies. Am I missing something?

As the Rolls-Royce share price lingers in penny stock territory, our writer revisits the investment case that has attracted him…

Read more »

Compass pointing towards 'best price'
Investing Articles

How to put a valuation on the Woodbois share price

The Woodbois share price has fallen from its recent spike, so should I buy now? And how can I work…

Read more »

Inflation in newspapers
Investing Articles

I’d fight inflation with these 2 FTSE 100 dividend shares

With inflation hitting a 9%, I'm boosting my passive income and turning to these two FTSE 100 dividend stocks.

Read more »

New Ways of Investing - Hands Only Using Smart Phone
Investing Articles

2 cheap Footsie stocks to buy for BIG dividends!

The recent stock market sell-off leaves plenty of top stocks looking too cheap to miss. Here are two great Footsie…

Read more »