Marks and Spencer’s (LSE: MKS) share price has fallen a long way in 2022. At the start of the year, it was near 230p. Today however, it’s 110p. Is this a good opportunity to buy M&S shares for my portfolio? Or are they a value trap? Let’s take a look.
Is now the time to buy the shares?
M&S shares do look quite cheap right now. For the year ending 2 April 2023, City analysts expect the retailer to generate earnings per share (EPS) of 15.5p. This means that at the current share price of 110p, the forward-looking price-to-earnings (P/E) ratio is just seven.
That’s a low valuation. To put that number in perspective, Tesco and Sainsbury’s currently have forward-looking P/E ratios of 10.5 and 9.8 respectively, So, on a relative basis, there could be some value on offer here.
Cheap for a reason?
Having said that, it could be argued that Marks and Spencer shares are cheap for a reason. Right now, the company is facing a number of challenges.
For a start, shoppers are taking aggressive steps to cut costs. So, on its food front as a higher-priced supermarket, the company is going to have its work cut out to retain its market share. It’s worth noting here that for the 12 weeks to 4 September, Aldi’s sales rose by 18.7%, taking its UK market share to 9.3%, while Lidl’s sales rose by 20.9%, taking its market share to 7.1%.
Then, there’s inflation. At the moment, M&S is being hurt here in a number of ways. It’s facing cost price inflation, as products are costing far more to purchase. It’s also facing wage inflation, as the company has had to increase staff wages.
Additionally, there’s energy price inflation. In a recent update, the company said that energy costs were £40m higher than planned. It’s worth noting that City analysts are currently revising their EPS forecasts for Marks and Spencer down, due to these costs.
A third issue is debt on the balance sheet. At 2 April, the company had net debt of £2.7bn on its books. That’s quite high given that its operating profit before adjusting items last year was only £709m.
Turnaround plan
Now it’s worth pointing out that M&S is making an effort to streamline the business and improve efficiency. In a presentation posted last month, it said that in the years ahead, it plans to:
- Focus on growth categories and channels
- Simplify the organisation
- Rotate to higher quality new space
- Deliver £400m in cost savings
- Achieve 10m app users
This all sounds very sensible. However, there’s no guarantee it will be able to execute on this plan.
MKS shares: my move now
Putting this all together, I don’t feel the need to rush out and buy Marks and Spencer shares for my portfolio today. The stock is cheap. However, that reflects the challenges the company is experiencing at the moment and these challenges could persist for a while. I’m concerned the stock could be a value trap.
All things considered, I think there are better stocks I can buy right now.
