Two FTSE 100 shares I reckon are trading at bargain levels are Tesco (LSE: TSCO) and Marks & Spencer (LSE: MKS).
Here’s why I’m looking to buy some shares the next time I have some cash.
Breaking down the valuation
Both firms are in the retail space, albeit at different ends of the spectrum. Marks & Spencer is considered a more premium brand with luxury goods. In comparison, Tesco serves a wider range of consumers through branded goods as well as its own essentials range.
To value the shares, I’m using the price-to-earnings-to-growth (PEG) ratio. This ratio is a mix of the current price-to-earnings (P/E) ratio and expected earnings growth. A reading of under one can indicate that a stock may be undervalued.
Tesco’s current PEG ratio is 0.48. In addition to this, the shares are up 28% over a 12-month period from 226p at this time last year, to 290p, as I write on 13 December.
Marks & Spencer’s PEG ratio comes in at 0.49. Its shares are up 122% over a 12-month period from 119p at this time last year, to current levels of 265p.
For both firms, the current economic instability and cost-of-living crisis has created issues. Budget supermarkets Aldi and Lidl have continued to prise away market share from more established businesses in the UK. This is due to budget conscious consumers looking to make their cash go further. This is an ongoing risk I’ll keep an eye on.
The investment case
Taking a closer look at Tesco, it still possesses the largest grocery market share in the UK. This will help boost performance and investment viability. In addition to this, it continues to move forward with growth aspirations. For example, it is spending heavily on digital channels to bolster its e-commerce offering. I noticed that Lidl hasn’t yet entered this space and Aldi is a relative newcomer as well. There’s a chance that once they catch up, Tesco could be impacted.
Tesco is also looking to grow its store presence. It’s earmarked Ireland as a growth avenue and is planning further store openings here as well as a foray into the South Korean market.
Marks & Spencer’s transformation strategy looks to finally be paying off. It has invested heavily into digital channels and e-commerce, helping it build a commanding online presence. It has also spent money on its store presence and infrastructure, something I reckon can be seen by visiting one of its locations as they all now offer modern facilities and I personally can see a stark difference from the dated presence of a few years back.
Marks & Spencer released half-year results last month which solidified my belief that the business is on the up. Profit jumped by 84% compared to the previous year. In addition to this, free cash flows finally turned positive. This allowed the firm to declare a dividend for the first time in four years.
On the subject of returns, Tesco and Marks & Spencer’s dividend yields of 3.79% and 0.5% respectively would boost my passive income stream. However, I’m aware that dividends are never guaranteed.
To conclude, both stocks look like great value plays and are trading cheaper than expected right now. I think they could be shrewd buys.
