Marks and Spencer (LSE: MKS) today reported on trading for the 13 weeks to 30 December, with chief executive Steve Rowe describing it as “a mixed quarter.” The market appears to have taken a less charitable interpretation, sending the shares down 6% to 305p as I’m writing.
I’ve long maintained a dim view on the prospects of the FTSE 100 firm delivering sustainable returns for investors. Today’s update only confirms my belief that this is a stock to sell, as I see far more appealing picks for long-term investors elsewhere in the market.
Running up a down escalator
The company said Christmas trading went “some way” to offsetting a “weak” clothing market in October and “ongoing underperformance” in food like-for-like sales. Group revenue for the period was down 0.1%, not helped by a 9.8% fall in international sales due to planned closures of owned stores in lossmaking markets.
However, the UK is key for M&S, because it accounts for 90% of the group’s revenue. A 0.4% decline in UK like-for-like food sales and a 2.8% drop in clothing and home like-for-likes show the company is struggling as shoppers tighten their belts. The only real relief in the update was that management said, “full-year guidance remains unchanged.”
Poor returns for long-term investors
According to the analyst consensus forecast on M&S’s website, the company will post earnings per share (EPS) of 28.1p for its financial year ending 31 March (8% down on the prior year) and maintain its dividend at 18.7p. This gives a price-to-earnings (P/E) ratio of 10.9 and a dividend yield of 6.1%.
However, while it can be argued that M&S is a decent contrarian buy for its latest attempt at a turnaround, we’ve been here several times before over the last two decades, only for hopes of a sustainable recovery to be dashed. The shares are trading at the same price as at the dawn of the century and with shareholders also having suffered two dividend cuts (37.5% and 33.3%) since the turn of the millennium, I don’t see the business or the current valuation as attractive for long-term investors.
Top of the cycle?
Housebuilders have been making like bandits since the financial crisis in an environment of low interest rates and shot-in-the-arm government policies, such as Help to Buy. Their profit margins and price-to-book (P/B) valuations are at cyclical highs. Berkeley Group (LSE: BKG), for example, has an operating margin running at an unprecedented 31.8% and a P/B of 2.3 at a current share price of 4,170p.
However, with interest rates now swinging up and the profits and practices of the big builders also coming under political scrutiny, I believe we’re approaching the top of the cycle. Furthermore, the ‘structural housing shortage’, which many investors are relying on to support further gains, isn’t new and didn’t prevent builders’ shares crashing during the financial crisis.
London falling
Berkeley is particularly exposed to London and the South East, where house prices are already falling. While analysts are forecasting EPS of 510p for its financial year to 30 April, giving a P/E of just 8.2, they’ve pencilled in an EPS drop of 31% to 350p for fiscal 2019, which pushes the P/E up to 11.9.
I don’t view the valuation as attractive at this stage of the cycle. And with Berkeley’s chairman and celebrated caller-of-housing-cycles Tony Pidgley also cashing-in big chunks of his shareholding over the last year, I rate the stock a ‘sell’.
