Many cheap UK shares have soared in value as optimism over the economic recovery has gathered pace. The Marks & Spencer Group (LSE: MKS) share price, for example, has risen strongly over the past year, helped by a positive reaction to latest trading numbers in August.
Investors in the retailer are hoping that the reopening of its stores en masse will reignite its latest turnaround attempt. I’m not so sure though, as brick-and-mortar retail continues to struggle.
Like all major retailers, Marks & Sparks has invested heavily to build its online presence. But it was slow with this and the business is still heavily reliant on its store estate to drive the top line. This means risks remain as e-commerce goes from strength to strength among both pureplay and omnichannel rivals.
M&S’s online operation is much less sophisticated than those of its major rivals. That said, its August update showed online sales of clothing and homewares rose 22.2% in the 19 weeks to 14 August. But by comparison, internet sales of full-price items at rival Next leapt 44% in the three months to 17 July. Sales at M&S stores meanwhile, rocketed 178% as shoppers flocked back into its shops following the post-lockdown reopening.
Profits set to rocket?
All that being said, some would argue that Marks & Spencer’s an attractive cheap UK turnaround share at current prices of 182p. City analysts think earnings at the firm will rise 908% in the financial year to March 2022. This will happen as strong consumer spending continues. And they don’t think this rebound will be a flash in the pan either. An 18% profits rise is forecasted for fiscal 2023 too.
All this leaves Marks & Spencer trading on a forward price-to-earnings growth (PEG) ratio barely above zero. Remember that a reading below 1 suggests a stock could be undervalued by the market.
It could especially be argued that this offers terrific value given the strength of recent trading at the company. In August’s update, M&S said it expected adjusted pre-tax profit to hit its upper guidance of between £300m and £350m. That’s assuming no other significant Covid-19-related turbulence occurs.
A cheap but risky UK share
It’s possible that the firm’s ‘Never The Same Again’ recovery strategy will pay off handsomely. These measures include accelerating the revamp of its long-troubled clothing business, cutting costs more quickly and improving its digital operations (this included linking up with Ocado to sell M&S’s food lines).
However, I think this cheap UK share is cheap for good reason. M&S has a long history of launching doomed recovery plans and the competition is tougher now than ever before, due to the growth of e-commerce.
There’s also the threat of severe supply problems dragging long into the future and the possibility that its revenues-driving stores could be shuttered again as Covid-19 infection rates increase. I’d rather buy lower-risk growth stocks today.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Next. The Motley Fool UK has recommended Ocado 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.