Marks and Spencer share price: FTSE 100 bargain or a value trap?

Could Marks and Spencer Group plc (LON: MKS) outperform the FTSE 100 (INDEXFTSE: UKX) due to its low valuation?

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The performance of the Marks and Spencer (LSE: MKS) share price in the last year has been disappointing. The retailer has recorded a fall in its value of around 20%, with tough operating conditions contributing to lacklustre financial performance. This has put the company’s shares on a price-to-earnings (P/E) ratio of 12 and a dividend yield in excess of 6%.

Both figures may appear to be relatively appealing for a business with a long track record of robust performance versus its peers. However, with a number of other options available in the FTSE 100, could the retailer prove to be a value trap? Is it worth avoiding alongside another cheap stock which released a positive update on Wednesday?

Positive outlook

The company in question is real estate investment trust (REIT) Great Portland Estates (LSE: GPOR). It released news that it has signed 24 new lettings across 90,000 sq ft. in the three months to the end of September. They are expected to generate a combined annual rent of £5.3m, with market lettings being 6.5% ahead of the March 2018 ERV (estimated rental value). The company also settled seven rent reviews during the quarter, securing £2.4m of rent which represents a 16.3% increase over the previous rent.

Alongside an update on lettings, the company also announced the same of 55 Wells Street for a headline price of £65.46m. It reflects a net initial yield of 3.99%. The building was developed by Great Portland Estates in 2017 and its sale fits with a strategy of recycling capital out of mature assets.

With a price-to-book (P/B) ratio of around 0.8, Great Portland Estates appears to offer excellent value for money. The outlook for the UK economy may be uncertain. But with a margin of safety and a solid asset base, its long-term performance could be impressive.

Uncertain outlook

With Marks and Spencer having a relatively low valuation, it could offer value investing potential. Of course, it faces an uncertain near-term outlook. Its bottom line is expected to fall by 6% this year, and then by a further 1% next year. With there being a continued transition of shoppers from in-store to online, the company may experience further challenges beyond next year. As such, it could prove to be a testing time for its investors.

A 6.4% yield, though, means that total returns could be relatively strong even during a tough period for the business. Dividend payments are covered 1.4 times by profit, which means they are relatively sustainable. And with the potential for a turnaround due to its strength in the food retail business and its loyal customer base, the long-term prospects for the business appear to be sound.

Marks and Spencer could prove to be a strong recovery stock. The UK’s economic outlook may be more positive than investors are pricing in, with high employment levels and wage growth being ahead of inflation at the present time. As such, after a tough year, the company could offer investment potential.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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