The Marks and Spencer (LSE: MKS) share price was in sparkling form this morning following the release of an expectations-beating half-year update on trading. Could we be seeing one of the great stock market comebacks? And should I consider getting involved?
Profits jump
Fuelled by the recovery from the pandemic and a transformation plan, pre-tax profit and adjusting items came in at £269.4m over the 26 weeks to 2 October. That’s almost 53% up on that achieved over roughly the same period in the pre-pandemic 2019/20 financial year. It’s also above the £205m-£264m range predicted by analysts.
Although hard to ascertain whether growth was down to the company’s efforts to transform the business or the recovery in consumer spending following multiple lockdowns, food sales rose 10.4% over the period. Elsewhere, Marks’s long-derided Clothing and Home (C&H) division recorded a 17.3% rise in full-price sales and increased market share. No less than 34.4% of total sales from this part of Marks and Spencer now come from online.
It gets better. Looking ahead, the retailer said that trading in the first four weeks of H2 had been “consistent with growth rates reported in Q2 and ahead of plan”. As a result, it expects recent demand “to be sustained in the near term” and is now targeting full-year pre-tax profit and adjusting items to be ahead of previous expectations at roughly £500m.
Contrarian pick
Today’s jump in the Marks and Spencer share price builds on the momentum seen over the last 12 months. In that time (and taking this morning’s move into account), the stock has climbed 87% in value. That’s an excellent result and provides evidence of how potentially lucrative contrarian investing can be.
Despite this recovery, MKS still traded on a valuation of 13 times earnings before traders sat down at their desks this morning. That looks fairly reasonable relative to industry peers. Next, for example, trades on 16 times forecast earnings and lacks Marks’s earnings diversification. It also looks reasonable considering the former’s plan to open 20 new stores and the progress made in reducing its debt pile. This now sits at £3.15bn, down from a little over £4bn in 2019/20.
Regardless of today’s move, the Marks and Spencer share price remains almost 30% below where it stood in 2016. To make matters worse, the company isn’t paying a dividend. Now, I’m more than willing to wait for a stock to recover. Even so, I would prefer to be receiving some form of compensation for my patience in the meantime. For me, this is easily one of the biggest issues with buying MKS stock now.
Unfortunately, the return of payouts looks some way off due to inflationary pressures. Throw in Covid-19-related obstacles, Brexit, supply chain concerns and old-fashioned competition and MKS is far from the home run today’s rise might suggest.
More upside ahead
Based on today’s report, however, it really does feel like this company is starting to get its mojo back. Assuming it has a positive festive period, I’m confident there’s more upside ahead for the Marks and Spencer share price.
Notwithstanding this, it’s clear that I shouldn’t get carried away given the multiple headwinds the company still faces. So, if I were to buy today, I’d definitely ensure that I was suitably diversified beforehand.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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