Marks and Spencer (LSE: MKS) shares have had a great run. Over the last year, they’ve risen about 60%. I think the food, fashion and lifestyle retailer could still be one of the UK’s best value stocks however. Here’s why.
My trip to M&S
Over the recent bank holiday weekend, I took a trip out to Westfield London and I popped into the large M&S store there.
Immediately, two things struck me. The first was that the store was rammed with customers. There was absolutely no sign of a consumer slowdown.
The second was that the retailer’s clothing range was very impressive. From wardrobe staples to on-trend fashion, there was a lot tempting customers to buy (and people were buying).
We can often learn a lot about a company’s business performance from a simple store visit like this.
Legendary fund manager Peter Lynch – who generated a return of about 29% a year for his investors between 1977 and 1990 – used to visit shopping centres all the time to see which stores were thriving. So walking out of the Westfield store, I made a note to take a look at the stock and its valuation.
Still dirt cheap
Looking at the stock’s financials, my view is that there could be a big value investing opportunity here. For the current financial year ending 31 March 2025, analysts expect M&S to generate earnings per share of 25.1p.
This means that at today’s share price of 271p, the company’s price-to-earnings (P/E) ratio is just 10.8. That strikes me as a low earnings multiple, given the momentum the company has right now. In other words, I see the stock as undervalued.
But the low valuation isn’t the only thing that’s attractive about Marks and Spencer shares. Another factor is the rising dividend. This year, the dividend forecast is 6.2p (a yield of 2.3% today) – nearly double the forecast for the year ended 31 March.
With dividends on the up, we could see a whole new set of investors (those seeking passive income) come into the stock.
One other thing that’s worth mentioning is that several brokers have recently turned bullish on the shares. Last month, for example, both JP Morgan and Jefferies upgraded the stock to the equivalent of ‘buy’ ratings.
This kind of broker activity is generally a positive factor for a stock.
A couple of risks
Of course, there are plenty of risks here too. One is competition from rivals. In the clothing space, the company has a huge amount of competition. Not only is it up against the likes of H&M, Zara and Next, but it is also facing competition from online start-ups that are popping up on social media platforms.
Another risk is higher costs due to inflation. These could hurt the company’s profits margins and negatively impact earnings growth.
Trading on a P/E ratio of just 10.8, however, I reckon there’s a margin of safety. All things considered, I really like the risk/reward set-up here.
