The effect of the Covid-19 crisis on Marks & Spencer (LSE: MKS) has become more apparent since the high street name announced the loss of 950 jobs. Well, the M&S share price has been a bit of a giveaway too, and about the best that can be said about it is that it’s steady.
Unfortunately, that steadiness is still only at the same levels as the depths of the 2020 stock market crash. And while many FTSE 100 and FTSE 250 companies have experienced some sort of recovery, there’s been little sign of life at M&S.
As I write, the Marks & Spencer share price is down 56% since the start of 2020. But the coronavirus pandemic is only the latest in a series of disasters for M&S, whose shares have now lost 80% of their value in five years.
But every share has to have some price at which it’s a buy, right? Well, maybe, but determining that price is a near impossible job. So what about the Marks & Spencer share price? Has it finally reached a point where no more can go wrong and the only way is up?
Tricky valuation
Well, the valuation of M&S shares right now does not make me rush for the buy button. The year ended March 2020 was the fourth in a row to record falling earnings, with earnings per share half what it was in 2016. And with the virus slump set to hit company profits hard this year, forecasts are not rosy.
There’s an analysts’ consensus for an EPS crash of around 60% this year. If that turns out accurate, on the current M&S share price we’d be looking at a price-to-earnings ratio of 14.5. That’s close to the market average, in a good year. Forecasts for the following year suggest a big earnings rebound, which would drop the P/E to about 8, and would see a reinstated dividend yielding around 5.5%.
M&S share price recovery?
That two-year-out scenario does look very attractive on the face of it, but several things shout caution to me. One is that forecasts even beyond the end of next week are somewhat uncertain these days. And I’d place very little faith in predictions of a 2021–22 recovery until we’re a lot closer to the time.
In fact, if there’s one rule I’ve added to my strategy from my experience of the last decade of share price shocks, it’s this: Never buy into a recovery until you see the recovery happening.
Another negative for me is that M&S has, for decades, had an uncanny knack of turning expectations into disappointments. I’d want to see a reversal of that, too, before I’d think of buying.
Debt worries
And finally there’s M&S’s net debt, which stood at $4.03bn at 28 March. That does include lease liabilities as current accounting standards require. But even with lease liabilities excluded, we’re looking at net debt of £1.46bn. That’s 6.5 times the firm’s free cash flow for the year, and close to 80% of its market cap.
Will the Marks & Spencer share price recover and soar in the future? At this point, I’m not even convinced M&S will survive in its current form.