Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at Marks and Spencer (LSE: MKS) (NASDAQOTH: MAKSY.US) to ascertain if its share price can return to 743Pp.
Initial catalyst
Of course, before we can establish whether or not M&S can return to 743p, we need to figure out what caused it to reach this level in the first place. It would appear that M&S reached this high at the end of 2007, in part due to the general euphoria of the wider market, directly preceding the financial crisis.
However, 2007 was also a great trading year for M&S as the company’s adjusted profit before tax jumped nearly 30% and management raised the dividend payout a similar amount. As a result, investors were prepared to pay a premium for M&S’ shares.
Unfortunately, as the financial crisis set in M&S’ sales and share price collapsed. Indeed, within 13 months of reaching 743p, M&S’ share price had declined 70% and profits for 2009 were half of those reported for 2007.
But can M&S return to its former glory?
Sadly, M&S has been unable to return to the glory days of 2007. In particular, according to the company’s most recent full-year results, underlying profit before tax is still around 40% less than the £1 billion profit reported during 2007.What’s more, the group’s sales only expanded 1.3% last year, a sharp contrast to the sales growth of 10% reported during 2007. Additionally, underlying profit declined 3% from the year before.
With profits sliding and sales expanding at an almost glacial rate, investors are unlikely to place a growth premium on M&S again anytime soon. Furthermore, to be able to justify a return to 743p M&S would have to nearly double its profits, not an easy task.
Nevertheless, M&S’ management is working hard to try and get the business back on track and has just completed a multi-year transformation of updating stores. As a result of this transformation, management expect an improvement in free cash flow by 2015 and are now focusing their energy on improving shareholder returns.
Foolish summary
All in all, M&S’ management is currently working hard to turn the business around but the company still has a long way to go before it can return to the level of profitability achieved during 2007.
So overall, I feel that Marks and Spencer cannot return to 743p.
