Investment View: M&S looks on the pricey side as a double-dip looms

With earnings likely to be flat or falling and no hint of a return to growth, it is of interest only for the dividend
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The Independent Online

Marks & Spencer: OUR VIEW: Avoid. SHARE PRICE: 323.1P (8.9P)

Now the dust has settled on its trading statement earlier this month, shares in Marks & Spencer have started to drift steadily downward. That is no real surprise. Marks' trading could have been worse. Its (class act) food offering helped the company to just about meet the City's expectations.

But margins are under pressure across the board (and food margins are low anyway). Profits are likely to struggle to break the £700m barrier for the current financial year and Marks' consumers are struggling. It looks very much like the double-dip downturn is upon us.

Those margins are going to remain tight because M&S doesn't have pricing power. If it wants its struggling general merchandising arm to avoid a tailspin it will have to price keenly to keep consumers' interest alive.

It is true that input costs should ease during the first part of this year, but benefits might just have to be passed on to customers in the form of yet more discounts.

Are there any positives at all? Well, yes. M&S is by no means a basket case. Far from it. It made over £1bn as recently as 2008. Sales have continued to rise but profits have not.

All the same, £700m before tax is not to be sniffed at. There are any number of the company's high street rivals that would give their right arms for performance like that. And while M&S is going to find the new year a tough one, most analysts believe that the retailer should at least be able to produce a similar number for the 2013 reporting year, which means that the chain's all-important dividend should be maintained at the very least. M&S currently offers a tasty prospective yield of about 5 per cent. What's more, it is more than 2 times covered by earnings. As such, M&S should be able to keep it steady. There are, as this column has suggested, companies with similar yields that offer better prospects.

All the same, M&S's payout doesn't look under serious threat for the moment. The business would have to enter a real tailspin for that to happen. That seems unlikely. The abilities of chief executives to influence company performance have often been overstated. However, Marc Bolland at least knows his onions, although he still has to prove he is as adept with his bras and his summer dresses. It is worth noting that his old employer, Morrisons, is by a distance the weakest of the supermarkets in the category of general merchandise. It was good at food so perhaps it is no surprise that Bolland's M&S is also good at food.

The biggest issue for investors right now, though, is that M&S shares are no bargain. They trade on nearly 10 times' 2012 forecast earnings, if you believe the consensus profit forecasts. And I'm slightly sceptical. M&S shares are cheaper than great rival Next, for example, but a shade more expensive than, say, Tesco. They are also still at the top end of the trading range established since the end of August. M&S was bouncing around the 400p mark in June but declined sharply towards the end of the summer and has since been between 300p and 340p.

With a continuing flow of bad economic news likely for at least the next few months, it is hard to see the shares breaking out of that. They are much more likely to ease back. For the moment, then, the conclusion has to be that M&S is best avoided. With earnings likely to be flat or falling and no hint of when a return to growth might realistically come, the shares look to be on the pricey side and of interest only for the dividend.

Therefore, I would say avoid for now. However, if they fall back to the 300p mark, or even below, I would be willing to review that stance and look at buying again.

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