Iconic FTSE 100 British retailer Marks and Spencer (LSE: MKS) is down 11% from its 22 April one-year high of £4.17.
At that point it disclosed it had been the victim of a cyberattack affecting its clothing and food operations. It expects the disruption to continue throughout June and into July. Additionally, it forecasts that the attack will have an impact of around £300m on its fiscal year 2025/26 operating profit.
To me, this scenario fits perfectly into the short-term risk/long-term reward investment category. Marks and Spencer is unsurprisingly now busy bolstering its online and related security. Although this does not entirely preclude further cyberattacks, it should greatly reduce the threat.
Consequently, this looks a short-term risk to me.
Conversely, the price drop exacerbates the already substantial long-term undervaluation I saw in the stock before.
As such, this looks a great time for investors whose portfolio it suits to consider the shares.
How undervalued is the stock now?
The optimal way I have found to pinpoint how undervalued any stock is through discounted cash flow analysis. This shows Marks and Spencer shares are 37% undervalued at their current £3.73 price.
Therefore, the fair value for the stock is technically £5.83.
Further underpinning my view of underpricing in the stock are its low key ratios compared to its peers’ average.
More specifically, it trades at a price-to-book ratio of 2.6 compared to the 5 average of its competitors. Its 0.6 price-to-sales ratio also looks cheap against its peers’ average of 1.4.
How does the core business look?
Its 21 May annual results for the fiscal year 2024/25 pointed to a very strong business.
Profit before tax and adjusting items jumped 22.2% year on year to £875.5m – the highest in over 15 years.
Food sales were up 8.7% to £9bn, giving an adjusted operating profit for the division of £484.1m. The operation’s volume and value share have now grown every year for the past three years.
Fashion, Home & Beauty sales also rose — by 3.5% to £4.2bn, generating a divisional adjusted operating profit of £475.3m. This operation’s value share has also increased every year for the past three years.
A longer-term risk to this growth is the intense competition in the sector that may squeeze its margins.
However, analysts forecast that Marks and Spencer’s earnings will increase by a whopping 22.7% a year to the end of fiscal year 2027/28. And it is such growth that is responsible for any firm’s share price and dividends moving higher over time.
My view
Aged over 50 now, I focus on stocks that generate a 7%+ dividend yield. This is so I can keep reducing my working commitments and live off these instead. Marks and Spencer only yields 1%, so it is not for me.
However, it was one of the first stocks I suggested my son buy when he turned 21. This was based on the firm’s strong earnings growth potential and what that would mean for its share price and dividends.
Nothing has changed in my view, so I still think it is a worthwhile stock to consider for other investors whose portfolio it suits.
