Paul Hill, one of Britain’s most successful private investors, picks the best – and worst – tips from the press and brokers’ reports, and suggests best. This week, with the retail environment likely to get ever more competitive, this company’s shares, like the goods on sale in its shops, are looking a bit too pricey.
Turkey of the Week: Marks & Spencer (MKS, 651p), tipped as a BUY by Deutsche Bank
The turnaround in Marks & Spencer’s fortunes since Stuart Rose’s arrival
two years ago has been a resounding success. Back then, like-for-like sales were falling 5% with EBIT margins at 8.4%. The product range was perceived by many people (myself included) to be expensive, stuffy and out of touch. But since then, Stuart Rose’s team has vigorously executed its “root and branch” reform. M&S has transformed itself through improved styles, cheaper buying, more attractive stores and, crucially, offering much better value for money. As a result, consumers have flocked back, significantly boosting footfall and sales. The brand has also undergone a huge make-over after a series of fresh marketing campaigns, such as
those starring Twiggy and her fellow supermodels.
This year, M&S is expected to achieve like-for-like sales growth of around 4.5% and generate 10.9% EBIT margins and earnings per share of 37.7p. The shares have also roared ahead from 350p in September 2005 to around 635p today, representing an 80% gain. However, it is on these occasions that investors need to stand back and take stock.
At 635p, I think the shares are expensive, because they trade on a current year p/e of more than 16.5. This is somewhat pricey for a UK retail stock, particularly as the profit margins are already rich compared to the rest of the sector.
Additionally, although M&S is the largest UK clothing retailer, with an 11.3% market share by value, it is still up against some aggressive competitors, such as Next, BHS, Tesco and Waitrose. These firms won’t just lie down. I’m sure, for example, that it is only a matter of time before Tesco launches its own internet clothing range, alongside its already successful online operations.
Moreover, Philip Green’s BHS chain had an “annus horribilis” last year, and in his own words made “stupid and fundamental” mistakes, especially in womenswear. M&S clearly capitalised on these self-inflicted problems, but
Philip Green – never a man to shirk a challenge – has come out fighting.
This year, he vows to spend £100m refurbishing the stores and is “working flat out from 6.30am to 11pm” to improve performance.
Going forward, I believe that the overall retail environment will be much more competitive, especially if debt-laden consumers also tighten their belts by either trading down to cheaper products or spending less on discretionary items. And this is a notoriously fickle industry: what is de rigueur one season can quickly become passé the next.
So even though management have done a great job in turning M&S around, further improvements will be much harder to achieve in light of the expected harsher retail climate. I value the shares on a prospective 14 times p/e multiple, generating a fair value of approximately 530p. On this basis, I advise investors to top-slice their holdings and reinvest the proceeds in better opportunities elsewhere.
Recommendation: TAKE PROFITS at 651p