Brokers can’t keep raising forecasts quick enough for this FTSE 100 stock

Jon Smith takes a look at some of the price target increases for a FTSE 100 stock that he believes could continue to outperform this year.

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Top brokers and bank research teams put out price forecasts for different FTSE 100 stocks. These are updated every couple of months (or when something major happens that calls for a revision). With some shares that are outperforming, there are occasions when the analysts can’t raise the forecast quick enough! Here’s one case I’ve spotted.

Looking at the price targets

Marks & Spencer (LSE:MKS) have recently been promoted back to the FTSE 100 thanks to strong growth. The share price is up 57% over the past year, with a market cap of £5.25bn. The stock currently trades at 257p, having been pushing higher for quite some time.

Analysts have been trying to keep pace with the gains and figuring out just how high it could go in the coming year. For example, at this time last year, Investec had a price target of 180p. This was raised last summer to 275p and then again at the start of this year to 316p! The current target is 320p.

Another case is JP Morgan. The research team had a target price of just 150p this time last year. Yet the team have been playing catch up for quite some time. Earlier this month, they raised their price target to a whopping 330p for the coming year.

Of course, I need to take these forecasts with a pinch of salt. If I had believed the previous targets, I would have sold the stock ages ago at much lower levels! So it goes to show that even the professionals can underestimate how high a stock can go.

Why the business is doing well

The fact that the forecasts have been eclipsed in the past year show how well the company has done. It’s true that financial performance has beaten estimates, particularly during a period when the UK high street in general is underperforming.

In the latest January update on Christmas trading, group sales were up 7.2% versus the prior year. If I strip out the disappointing international business, UK sales grew by 8.5%. This growth came from all divisions, ranging from Food to Clothing & Home. This shows me that the firm isn’t relying on one part to carry the whole group. Rather, it’s firing on all cylcinders.

Looking forward, I agree with some of the top banks that 300p could be hit in the coming year. The price-to-earnings ratio at 257p is 14.13. Although this is above average, it’s certainly not overvalued. If earnings grow for the current year by 15%-20%, then assuming the ratio stays the same, 300p would be where the share price should end up.

Monitoring the UK consumer

I do note the risk that the UK consumer doesn’t have a lot of disposable income right now. If interest rates remain high and we get another quarter of negative GDP growth, people might start to cut back on spending.

Even with that risk, it’s clear that Marks & Spencer have a growing market share. This should help it to minimise any potential demand slump. I like the stock, and am thinking about buying for further gains.

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.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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