Marks and Spencer shares could rise 29%, according to this broker

Marks and Spencer shares currently sport a P/E ratio of just 10, and one well-known City broker believes the company is undervalued.

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Marks and Spencer (LSE: MKS) shares have had a good run recently. Over the last year, they’ve risen more than 50%.

One broker reckons they can go much higher though. It believes we could potentially see double-digit share price gains from here.

Broker upgrade

The broker I’m talking about is JP Morgan.

In a research note posted last Thursday (12 April), it upgraded the shares from a ‘neutral’ stance to an ‘overweight’ (buy) rating.

It also put a 330p price target on the stock, which is about 29% higher than the current share price.

The broker listed several reasons for the upgrade including:

  • Marks and Spencer’s recent market share gains in clothing.
  • Low expectations from investors.
  • The company’s low valuation.

It’s worth noting that this is the first time since 2015 that JP Morgan has had an overweight rating on the shares.

Marks and Spencer has demonstrated the biggest positive inflection in market share coming out of the pandemic. Combined with more to go for in men’s and kidswear, along with compelling sales uplifts from store renewals, we see recent gains as sustainable.

JP Morgan

My take

In my view, this upgrade, and the new share price target, make a lot of sense.

I’ve said before that Marks and Spencer has been doing great things in the clothing space recently. I think it’s really starting to get this side of the business right.

Meanwhile, the current valuation does seem very low. With analysts expecting the company to generate earnings per share of 25p this financial year (ending 31 March 2025), the forward-looking price-to-earnings (P/E) ratio is only about 10.2.

Given that earnings forecast, the P/E ratio would only have to rise to around 13.2 for the stock to hit JP Morgan’s price target of 330p. To my mind, that earnings multiple is very achievable – it’s below the market average.

Looking ahead, one factor that could potentially help the share price rise is an increase in dividends. This financial year, the payout is forecast to rise 82% to 6.2p per share (a yield of about 2.4% at today’s share price).

This increase in the payout could attract those looking for both gains and income.

Risks

Of course, the big risk here is a downturn in consumer spending. While last year’s recession appears to be over, the UK may not be completely out of the woods yet from an economic perspective.

That said, Marks and Spencer does tend to serve an older, more affluent crowd. This could provide some insulation from future economic weakness.

Attractive investment opportunity?

In light of the recent upgrade from JP Morgan, I believe investors should consider buying Marks and Spencer shares today.

The company is performing well right now and the stock is quite cheap.

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.

Edward Sheldon 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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