The resurgence of Marks and Spencer (LSE: MKS) shares will surely go down as a textbook example of how lucrative it can be to go fishing for value stocks that other investors think are done and dusted.
If I’d had the foresight to back the FTSE 100 member just over two years ago, I’d have multiplied my cash many times over. Even just buying at the beginning 2024 would have given me a gain of almost 50%.
Today’s (6 November) M&S statement, covering the 26 weeks to 28 September, goes some way to justifying this momentum.
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Beating expectations
Revenue increased 5.7% to £6.48bn while profit jumped 17.2% to just under £408m. The latter massively surpassed analyst expectations of £361m.
Broken down, food sales rose 8.1%, while higher-margin clothing and homeware sales improved 4.7%. Elsewhere, the firm’s joint venture with Ocado posted an adjusted loss of £16m — lower than the £23.4 loss reported the year earlier.
Taking all this into account, I don’t think today’s incredibly positive reaction — getting on for +8% as I type — is all that surprising.
Will this continue?
The key question is whether the share price can go even higher. I wouldn’t bet against it, especially if the all-important Christmas trading period goes well. With inflation having cooled and interest rates (slowly) coming down, many shoppers could throw caution to the wind and splash the cash for the festive period.
Although investors shouldn’t assume too much, the company did say that trading over the first five weeks of H2 had been “on track” and that it was “confident of making further progress in the remainder of the year“.
An update should arrive on 9 January. So long as investor expectations haven’t got out of hand, they could be toasting a very pleasant start to 2025.
More to do
They are also likely to be lapping up the comments of CEO Stuart Machin with regard to the firm’s long-term strategy.
“In the spirit of being positively dissatisfied, we have so much to do over this year and beyond. Despite our strong trading momentum, there is much more opportunity for future growth and that energises us.“
He went on to say that Marks now wants to focus on improving its Home and Beauty offer and its digital infrastructure (where progress has been slower than anticipated). Meanwhile, a store rotation plan is gathering pace and an “international reset” is under way. On top of this, it’s confident of achieving £500m in cost savings by FY28.
This all sounds pretty good to me!
No sure thing
That said, it’s worth noting that Marks and Spencer shares already changed hands at a price-to-earnings (P/E) ratio of 15 times forecast earnings before markets opened this morning (6 November).
That valuation might still seem reasonable relative to valuations across UK stocks but it’s rather high for the retail/consumer defensive sector. It’s also worth bearing in mind that the impact of the recent Budget on the company, its suppliers and customers was “for now uncertain“.
So while I suspect the shares could move higher based on current sentiment, I don’t think they necessarily offer the value they once did.
For this reason, I’m going to check for any unmissable bargains in the rest of the market before deciding whether to buy in here.
