Why I think this small-cap stock could trash the Marks & Spencer share price

A defensive business with strong profit and dividend growth, this small-cap stock could knock spots off Marks & Spencer, argues G A Chester.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Marks & Spencer (LSE: MKS) is a structurally challenged business in a structurally challenged sector. Here, I’ll explain why I continue to see poor prospects for a turnaround in shareholders’ fortunes, and why I think small-cap Alliance Pharma (LSE: APH), which released its latest half-year results today, could be a far more rewarding investment.

High street carnage

Throughout history, the high street has never stood still. Names have come and gone over the years. However, the pace of change seems to have accelerated of late.

Debenhams’ collapse into administration in April was another venerable name to add to a long list of casualties in recent years. Just this week, investors woke up on Monday morning to a seven o’clock announcement that Thomas Cook had entered into compulsory liquidation.

And when the stock market opened an hour later, Marks & Spencer, a stalwart of the FTSE 100 since its inception in 1984, began officially trading for the first time as a FTSE 250 stock, following its ignominious demotion from the top index.

Short-staffed at the gene pool

Also yesterday, M&S made a shock announcement that chief financial officer Humphrey Singer has decided to leave the business after just 14 months. This follows the departure a few months ago of Jill McDonald less than two years after her appointment as managing director of Clothing and Home.

Singer will be sticking around while a successor is found, and chief executive Steve Rowe is handling clothing and home pro tem. But it leaves M&S having to find effective replacements for two key roles at a time when its attempting probably the most radical and wholesale transformation in its history.

No appeal

I’ve previously described M&S’s £750m move into a joint venture with online grocer Ocado as expensive, and something of a desperate and high-risk ‘Hail Mary pass’. A number of analysts have expressed a similar view, and I’m wondering if Singer’s departure signals there was also conflict within M&S about the Ocado deal.

Either way, the company’s 187p share price, sub-10 earnings multiple and above-6% dividend yield hold no appeal for me. Structural headwinds, risks and earnings forecast to skid lower both this year and next make it a stock to avoid in my book. 

Attractive sector and business

Alliance Pharma operates in an attractive defensive sector and with a low-risk business model. It owns or licenses the rights to more than 90 pharmaceuticals and consumer healthcare products, and generates sales in more than 100 countries.

Many of its products are sold in a limited number of local markets and require little or no promotional investment. However, it’s also building a portfolio of what it calls  International Stars — brands with significant international or multi-territory reach. Currently numbering five, these brands benefit from promotional investment and central strategic oversight.

Good value

The group today reported first-half revenue growth of 21% (including organic growth of 10%), as International Star brands, led by scar treatment product Kelo-cote, continued to perform strongly. Underlying earnings increased 15% and the board lifted the interim dividend 10%.

At a share price of 73.75p (2% up on the day), Alliance trades at 14.6 times current-year forecast earnings with a prospective 2.2% dividend yield. This looks good value to me for the strong growth on offer and with the company eyeing further “carefully targeted acquisitions over the next few years.” I rate the stock a ‘buy’.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Alliance Pharma. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »