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

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’.

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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.