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Marks and Spencer shares: the hottest FTSE 250 stock I’d buy today

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Image source: Getty Images

Retail and supermarket stocks had a terrible 2022. Marks and Spencer (LSE:MKS) shares weren’t spared as it was of the worst performers, declining almost 50%. Nonetheless, its latest Q3 update indicates a bright future ahead, and it’s why I’ll be looking to buy the stock.

About Marks And Spencer Group Plc

Last updated 18-01-2023, 04:30:00pm GMT

Current Price
151.10p

Change
0.20p (0.1%)

Close Price
151.10p

Open Price
152.00p

Bid
151.35p

Ask
151.40p

Day Range
149.60p – 152.60p

Year Range
91.56p – 229.87p

Volume
7,188,371

Average Volume
8,966,003

Market Cap
296,454,469,000.00p

Earnings Per Share
15.66p

Top Marks for top numbers

Marks and Spencer shares have been the FTSE 250‘s most actively traded stock in 2023 so far. This has been helped by its excellent Q3 trading update which saw the retailer post some top numbers.

Metrics

Total sales growth

Like-for-like sales growth

Food sales

10.2%

6.3%

Clothing and home (C&H) sales

8.8%

8.6%

Total UK sales

9.7%

7.2%

International sales

12.5%

N/A

In fact, the grocer outperformed every supermarket in terms of basket value during the Christmas period, helped by its acquisition of Gist and uptick in M&S Collection sales. Consequently, CEO Stuart Manchin cited a record market share for food, while C&H’s market share hit a seven-year high of 10%.

Building growth

As a result, management has opted to accelerate its goal to phase out older stores for newer, revamped ones by the end of FY26. The first phase of the initiative has already begun with 20 stores in the pipeline. These are expected to begin operating by the end of FY24.

The goal is to turn its current 247 stores into 180 full-line stores and over 100 food sites, with a focus on retail parks. This is a wise move due to the cheaper costs to operate them and larger basket sizes.

Sales at retrofitted and newer stores are comfortably outperforming older variants. And with a rather short payback period of two years, it only makes sense to do it as soon as possible. Hence, it’s no surprise to see the company’s return on capital employed improve dramatically of late.

Marks and Spencer ROCE
Data source: Marks and Spencer

What’s more, this move should help the group’s balance sheet. The British firm owns about 40% of its estate. As such, the move should see its lease liabilities drop by approximately £300m, with the retail giant taking over former Debenhams sites.

Remarkable valuation

That said, it’s worth noting that Marks and Spencer doesn’t have the most pristine balance sheet. Regardless, it’s still commendable to see declining debt with improving cash flow over the years.

Marks and Spencer Financials
Data source: Marks and Spencer

Provided the FTSE stalwart continues its positive momentum, a return of dividend payments may even be possible as soon as April. If this happens, I can imagine there would be plenty of excitement surrounding the shares as it would attract plenty of investors seeking passive income.

Nevertheless, I won’t be waiting until then because the stock is trading at rather cheap valuation multiples today. When compared to its historical P/E and the multiples of its supermarket peers, M&S definitely looks like a bargain despite its recent rise.

Metrics

Marks and Spencer

Tesco

Sainsbury’s

Price-to-earnings (P/E) ratio

9.7

20.0

10.0

Price-to-sales (P/S) ratio

0.3

0.3

0.2

Price-to-book (P/B) ratio

1.0

1.2

0.7

Price-to-earnings growth (PEG) ratio

0.1

0.1

0.1

With the board reiterating its full-year guidance and grocery inflation tapering off as well, I’m expecting margins to begin expanding in the medium term.

Grocery Price Inflation Data (Y/Y)
Data source: Kantar

Deutsche may rate the stock a ‘hold’ with a price target of £1.45. However, I’m more akin to agree with JP Morgan on its ‘overweight’ rating and price target of £1.55. Although this doesn’t present much of an upside from current levels, I think the long-term potential for Marks and Spencer shares hasn’t been priced in. Therefore, I’ll be looking to buy the stock once my preferred broker launches UK shares on its platform.

The post Marks and Spencer shares: the hottest FTSE 250 stock I’d buy today appeared first on The Motley Fool UK.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. 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.

Motley Fool UK 2023