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I’d avoid the Marks & Spencer share price and buy this growth stock

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Marks & Spencer (LSE: MKS) is one of the UK’s most storied retailers. Unfortunately, during the past few years, the company has just not been able to do anything right. The group has lurched from one problem to another. Sales have declined and so have profits. The stock price has followed suit. And I don’t think the firm is going to change direction any time soon. That why I’m avoiding the Marks & Spencer share price for the time being.

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Avoid the Marks & Spencer share price

Even before the pandemic, Marks & Spencer was struggling. The group reported a net profit of nearly £500m in 2015. That made it one of the country’s largest and most profitable retailers.

However, by 2020, net income had collapsed. It fell 90% to £42m in the four years to 2019. At the same time, group debt more than doubled, and return on capital employed — a measure of profit for every £1 invested in the business — fell by more than three quarters. 

Looking at these fundamentals, I don’t think it’s surprising that the Marks & Spencer share price has fallen by more than 75% since 2015. 

By comparison, Avon Rubber (LSE: AVON) shares have surged by more than 340% over the same period. This suggests Avon has outperformed M&S by 415%, excluding dividends, since 2015. 

The Avon way 

I believe the main reason why Avon has outperformed the Marks & Spencer share price over the past five years is its culture. While the retailer has changed strategy and thrown money at expansion in a tough sector, Avon has doubled down on what it does best. In this case, that’s personal protection systems. This niche business is hardly exciting, but it can be profitable if done right, which is exactly what Avon has been doing. 

As a result, as Marks’ profits have collapsed, Avon’s have surged. Analysts are expecting the group to report a net income of £40m for its current financial year, up 360% since 2015. 

As long as the personal protective equipment producer maintains this course, I’m incredibly optimistic about its potential. Not only is the group growing earnings, but it also has a strong balance sheet. At the end of its latest financial period, Avon’s cash balance was £100m. This could provide additional firepower for complementary acquisitions.

Then there’s the company’s dividend. Earnings growth and a strong balance sheet have enabled management to increase the payout at an average annual rate of 30% over the past five years. Once again, I think this trend is likely to continue as the business builds on its existing market position. 

So that’s why I’d buy Avon over the Marks & Spencer share price. I think the former’s growth is just getting started, while I reckon the latter will continue to struggle. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Avon Rubber. 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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