Marks and Spencer (LSE: MKS) shares have taken a big hit this year and, as a result, they now look cheap. At present, the FTSE 250 stock has a forward-looking price-to-earnings (P/E) ratio of just 7.9 – well below the UK market average.
Buying shares when they’re undervalued can often produce excellent returns in the long run. With that in mind, is now the time to buy Marks and Spencer shares for my portfolio? Let’s take a look.
Solid full-year results
The retail giant’s full-year results for the 52 weeks ended 2 April, were pretty solid. For the year, revenue hit £10.9bn, up 7% on the same period two years ago (last year’s figures were less meaningful, due to Covid distortions). Meanwhile, adjusted earnings per share came in at 21.7p versus 16.7p two years earlier, representing growth of an excellent 30%.
Cash flow was up significantly as well and this allowed the group to pay down its debt pile significantly over the period. Overall, it was a good performance, in my view.
Cost-of-living crisis
Looking ahead however, I have some concerns about M&S. My main concern is in relation to the cost-of-living crisis in the UK and the impact on consumer spending. Recently, market research firm Kantar said that over 20% of British households admit that they are “struggling” to make ends meet. Meanwhile, Lloyds Bank just came out and said that most of its customers have less than £500 in their accounts.
And things could get worse. “Somewhere between I think the autumn/October period and January, we’ll start to see it bite,” said M&S CEO Steve Rowe after the company’s full-year results.
I think this could have some major implications for the company in the year ahead. My gut feeling is that, with so many consumers strapped for cash right now, discount supermarkets such as Lidl and Aldi are going to attract a lot of customers over the next year at the expense of the higher-priced chains like M&S. This could reduce the company’s market share and hit its profits. Against this backdrop, it could be hard for Marks and Spencer’s share price to rise.
Lower earnings
Another thing that could put pressure on the share price is the fact that City analysts are currently lowering their earnings per share (EPS) estimates for this financial year. The last time I covered M&S, in mid-May, analysts were expecting EPS of 18.1p. Now however, they’re expecting 17.1p (a decline of over 20% from last year). These kinds of negative earnings revisions tend to hamper share price growth.
An additional concern for me is the company’s debt pile. While M&S has paid down debt recently, it still stands at £2.7bn as of 2 April. With interest rates rising, the group’s interest payments are likely to increase. This could also have a negative impact on profitability.
Should I buy M&S shares now?
Given these issues, I’m going to leave Marks and Spencer shares on my watchlist for now. All things considered, I think there are better stocks to buy in the current environment.