Back in May, I said that Marks and Spencer (LSE:MKS) could be one of the UK’s best value stocks. At the time, the shares were trading around 273p.
Fast forward to today, and the shares are changing hands for 317p – about 16% higher (a decent gain in less than three months). This begs the question: is M&S still a top value stock today?
The valuation is still low
Looking at the valuation here, it’s still quite undemanding, to my mind.
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For this financial year (Marks and Spencer’s financial year ends on 31 March), analysts expect earnings of 26.1p per share from the company. The following year, they expect 28.5p per share.
So at today’s share price we’re looking at a price-to-earnings (P/E) ratio of 12.1, falling to 11.1 using next year’s earnings forecast. Considering that earnings are expected to grow 6% this year and 9% next, I think these multiples are attractive.
For reference, the median forward-looking P/E ratio across the FTSE 100 is about 13.8 right now. So Marks and Spencer trades at a discount to the market.
Risks to earnings forecasts
Of course, earnings forecasts are not always accurate. And we need to look to see if there are any risk factors that could cause earnings to come in below these forecasts.
I think the main risk is an economic slowdown in the UK. This could lead to lower sales for the company, particularly in its fashion division.
One thing the company has going for it here however, is that its customer base tends to be a little more affluent. This could provide some insulation from a consumer slowdown.
Another risk is competition from other clothing retailers. There are so many these days and fashion can change quickly.
I’ve been impressed by the company’s fashion range recently though. It seems to have finally worked things out here (clothing and home sales rose 5.3% in last financial year).
Solid returns from here?
If we assume the earnings forecasts are accurate, the stock looks capable of providing solid returns from current levels.
In recent months, analysts at Deutsche Bank have put a price target of 350p on Marks and Spencer shares. There’s no guarantee the stock will get there of course but if it was to, it would represent a gain of about 10%.
There are dividends here as well though. Currently, the yield is a little under 2%. So investors could potentially be looking at returns of about 12% over the next year.
That’s obviously not a mind-blowing return. So perhaps it’s no longer one of the best value stocks (right now there are other bargain shares out there capable of providing much higher returns).
But it’s a decent return. Given that interest rates on cash savings accounts are heading lower, I’d certainly be happy with a 12% return from an investment over the next 12 months.
So, I think the shares are still worth considering today.
