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Marks & Spencer Group (MKS)
Boom time at M&S?
By David Brenchley | Fri, 21st April 2017 - 13:50
Listed companies with more brokers recommending 'sell' than 'buy' are few and far between, but Marks & Spencer (MKS) is one. According to Bloomberg data, there are twice as many analysts rating shares in the high street chain a 'sell'.
It piqued our interest, then, when we received a bullish 54-page note from Barclays, initiating coverage of Marks. It's a "non-consensual" 'overweight' rating, clearly going against the grain, and a price target of 410p implies upside of 50p, or 14% from here.
Clearly there are risks attached – it wouldn't be a contrarian view if there weren't. Latest data shows just how tough it is on the high street, with UK retail sales down a bigger-than-expected 1.8% last month.
However, reports of a busy Easter suggest that's likely just a blip – and the pound has strengthened against the dollar since Theresa May's general election announcement and remains buoyant Friday, suggesting markets are unconcerned.
M&S shares reacted well to the prospect of an election on 8 June and subsequent surge in sterling. A stronger pound potentially reduces costs for many UK retailers by making imported materials cheaper to buy.
And Barclays is certainly optimistic on Marks. Add the retailer's enviable position of having a pension surplus - £833 million at year end March 2016 and still £581 million at the interim results - and Barclays price target would move up to 445p, giving upside of around a quarter. It is only prudence that prevents it doing so.
M&S's share price has improved throughout April, and is currently almost 7% higher than where it started the month. Its 4.6% gain year-to-date means it's more or less back to where it was before the EU referendum.
Its case is predicated on an ongoing move away from clothing sales and more towards food retail, an area in which Marks has a good track record. Its plan to open 200 more Simply Food stores by March 2019 is described as "credible". Sales in new stores are performing well so far and are 17% ahead of plan in the first half.
Analyst James Anstead predicts that by 2020 food will account for 64% of M&S's UK sales. This is up from 52% in 2010.
On clothing & home there are clear challenges both in the short term (FX) and in the longer term (online). Whilst it cannot avoid these industry headwinds, Anstead says "its older and wealthier customer base may be helpful".
Its turnaround plan for this division will also help offset headwinds and new CEO Steve Rowe's store estate and product offering improvement plan is "comprehensive and sensible" and has delivered encouraging initial results.
"The plan to exit 10 overseas markets should boost earnings with fast payback," he continues. "M&S may also be able to refinance c. £800 million of expensive debt."
Then there's the question of M&S's meaty yield, currently 5.2% (around 40% more than the average FTSE 100 yield) and a key part of the investment case – since the start of its 2005/06 financial year, the firm has returned over £4.1 billion to shareholders in both dividends and share buybacks.
Unlike many high-yielding blue-chip stocks, Anstead reckons that Marks' is a safe dividend, arguing that if it had needed to be cut it would have happened in May or November 2016 when Rowe outlined his strategic plans.
"Secondly, with the company's more disciplined approach to capital spending, we expect that M&S will generate significant amounts of free-cash flow in the coming years and will be able to reduce its net debt – so we do not see any particular pressure on the dividend payment."
A forecast price/earnings (PE) multiple for 2018 at Barclays' target price of 14.5 times is not obviously cheap compared to its five-year forward average of 12.3 times.
However, Anstead points out in mitigation, its earnings per share (EPS) number is slightly depressed as, even for the year to March 2018, M&S will not be benefitting from the full elimination of its £45 million international losses. Further, its high depreciation charge as a percentage of pre-tax profit "undermines the meaningfulness of PE as a measure".
The last note we saw on M&S came from UBS at the back end of March that saw the broker downgrade the stock from 'buy' to 'neutral' with a target price of just 340p, which was only 4p above the share price at the time.
Analyst Andrew Hughes reckoned there was little chance of a rerating or positive earnings momentum in the foreseeable future. He spelled out caution on the dividend, with his forecast cover of 1.4 times in 2019 looking on the skinny side. On the flip side, at his target price, PE for 2018 stands at 12 times, bang in line with its five-year average.
Barclays' view is based on the food retail viewpoint, rather than clothing and home like most analysts – so who investors choose to align their views with depends on their view of the company and its divisions.
The attractive dividend, though, will sway many – as will the fact M&S is a staple name on the high street, which, as we learned from research by Investec Wealth & Investment yesterday, is a plus.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
|Bid / Ask||345.1 / 345.3|
|Day Range||340.5 / 345.3|
|52Week Range||306.70 / 397.80|
|Last Update: 17:09:15 (23/09/17)|