The FTSE’s Marks and Spencer (LSE: MKS) was a British retail institution for many years. To generations, it was a place synonymous with good quality at a fair price.
It struggled as the retail sector evolved and as it shifted its focus from those who had kept it in good profits for decades to try and target a younger shopper. It did not succeed in this highly unpredictable market. And in the process, it lost some of its former customers too.
As a result, it was demoted to the FTSE 250 from the FTSE 100 in 2019. It was promoted back in 2023 after refocusing on the fundamentals that made it successful in the first place.
Where are we now?
Since its promotion, it has produced one set of good results after another.
For its fiscal year ending 30 March 2024, profit before tax (PBT) soared 58% year on year to £716.4m. For the fiscal year ending 2025, PBT jumped 22.2% year on year to £875.5m – the highest in over 15 years.
But a snag appeared in April, as the firm reported being the victim of a cyberattack affecting both its clothing and food operations. It forecast the attack would have an impact of around £300m on fiscal-year 2026’s operating profit.
Following this announcement on 22 April, its share price has fallen 21%.
Future similar attacks like this remain a risk for the firm, although it boosted its cybersecurity. Another is the ongoing negative fallout from the October Budget’s 1.2% increase in employers’ National Insurance. Firms can either absorb the added costs themselves or pass them on to customers. In either event, it will be a drag on business.
However, analysts forecast Marks and Spencer’s earnings will increase by a whopping 18% each period to the fiscal year ending 2028. And it is growth here that ultimately drives any firm’s share price higher over time.
How does the valuation look?
My key share price assessment method is discounted cash flow (DCF) analysis. This highlights where any firm’s stock price should be, based on cash flow forecasts for the fundamental business.
The DCF for Marks and Spencer shows its shares are 47% undervalued at their present price of £3.30. Therefore, their fair value is £6.23.
DCF valuations are independent of the valuations of other firms. However, a comparison of principal stock measurements for its competitors appears to give secondary confirmation to this undervaluation.
Specifically, on the key price-to-sales ratio, the firm currently trades at 0.5 against a peer average of 1.3. These companies comprise J Sainsbury at 0.2, Tesco at 0.5, Walmart at 1.1, and Industria de Diseño Textil at 3.5.
My view
I believe that Marks and Spencer’s very strong earnings growth potential will drive its share price and dividends higher.
However, its current 1.1% dividend yield is too low for me to buy as an income stock. I look for 7%+ for those shares.
And I am happy with the stocks geared to share price growth that I already hold. Moreover, as I grow older, I am looking to sell some of these and buy more income stocks.
That said, for investors at an earlier stage in their investment cycle (I am over 50), I think the stock is well worth considering.
