Marks & Spencer (LSE: MKS) and easyJet (LSE: EZJ) have just seven trading sessions left to save themselves from being dumped out of the FTSE 100 in the summer quarterly index review.
According to my calculations, they’re currently the Footsie’s bottom-ranked constituents, and are set to be pushed out by FTSE 250 firms JD Sports Fashion and Aveva, which both stand poised for automatic promotion to the top index.
Do I think now is a good time to snap up shares in any of these companies?
Earnings multiples
My colleagues have been almost universally bullish on JD Sports for many years — and continue to be impressed by the company’s blistering growth. At a share price of 618.8p (market cap £6bn), it trades on a forward price-to-earnings (P/E) ratio of 20. I see a good business, but a multiple that’s a bit too rich for my liking in the retail sector, and I rate it a ‘hold’.
Software group Aveva just missed out on promotion in the last quarterly reshuffle, but its shares have continued to rise and now sit at 3,460p (market cap £5.6bn). I see this as another good business, but on a forward P/E of 36, I maintain my previous view that the sky-high earnings multiple makes it a stock to avoid.
Meanwhile, low earnings multiples (and high dividend yields) at Marks & Spencer and easyJet, suggest potential value on offer. However, I believe only one of the two represents a great investment proposition.
Green shoots (again)
In its annual results last week, M&S’s management spoke of “good progress in restoring the basics,” signs of “green shoots,” and so on. However, we’ve heard this time and again over the past few decades from previous management teams and turnaround plans at the company.
Sure, the current team has made a bold move in announcing a new joint venture with online grocer Ocado, but this strikes me as something of a ‘Hail Mary pass’, that is, a long shot. The price M&S is paying — up to £750m — is widely considered expensive. And long-suffering shareholders are being asked to cough up over £600m in a rights issue, as well as seeing their dividends slashed by 40%.
I’ve been saying for years that if I owned the stock, I’d be happy to sell and buy into a business with a more promising outlook. I see no reason to change my view at a share price of 246.3p (market cap £4bn), with a forward P/E of 10 and prospective dividend yield of 4.5%.
First-rate business
While I see M&S as a structurally challenged company in a structurally challenged sector (and a value trap for investors), I’m far more optimistic about easyJet. I think there’s genuine value on offer at the budget airline, whose share price of 919p (market cap £3.6bn), gives a forward P/E of 8 and prospective dividend yield of 6.2%.
Of course, for a company to be on such a cheap rating, investor sentiment has to be against it. In half-year results earlier this month, easyJet pointed to headwinds from “the ongoing negative impact of Brexit-related market uncertainty as well as a wider macroeconomic slowdown in Europe.”
I see a proven first-rate business in a cyclical, rather than structurally challenged, industry. I reckon the valuation of the stock is attractive for long-term investors, and I rate it a ‘buy’.