How Marks and Spencer Measures Up as a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth At A Reasonable Price," or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below 1 is generally considered decent value for money.

Today, I am looking at Marks and Spencer (LSE: MKS  )  to see how it measures up.

What are Marks and Spencer's earnings expected to do?

  2014 2015
EPS Growth 6% 9%
P/E Ratio 13.7 12.6
PEG Ratio 2.4 1.4

Source: Digital Look.

City forecasters expect Marks and Spencer to bounce back from the poor earnings performance of recent years, with growth penciled in this year and next after last year's 6% earnings per share (EPS) fall.

The British retailer's PEG rating for the year ending March 2014 runs ahead of the PEG value benchmark of 1, although it is set to dive much lower in the following 12-month period. Meanwhile Marks and Spencer's price-to-earnings (P/E) ratio during the next two years is expected to remain above the threshold of 10 -- any reading below this is considered good value.

Does Marks and Spencer provide decent value against its rivals?

  FTSE 100 General Retailers
Prospective P/E Ratio 17.1 24.1
Prospective PEG Ratio 4.8 2.2

Source: Digital Look.

Marks and Spencer compares extremely favorably to the FTSE 100 when judging both forward PEG and P/E ratios.

But although the retailer is far cheaper than its sector rivals when tallying up the P/E rating only, its slightly higher PEG multiple suggests that its growth prospects are not as appealing when compared with its sector peers. Indeed, concerns over continued weakness in the company's clothing division has kept its P/E rating suitably lower.

Even though Marks and Spencer's numbers exclude it as a traditional GARP stock, I believe that the firm provides a potentially fruitful turnaround story for those seeking decent growth over the longer term.

Multichannel strategy to drive multiyear growth
Marks and Spencer announced this month that underlying pre-tax profit slipped 5.8% last year to 665 million pounds, with group sales rising just 1.3% during the period to 10 billion pounds. In its key domestic markets, total sales rose just 0.9% during the period, although like-for-like sales actually fell 1%.

The retailer continues to suffer from insipid clothing demand, which pushed General Merchandise sales 4.1% lower on a like-for-like basis during the year. Enduring difficulties for the British High Street, combined with ongoing travails at its clothing department, are likely to constrain Marks and Spencer's growth potential at home.

To combat this, however, the company is actively pursuing opportunities abroad to boost earnings over the long term, and operations here provided a glimmer of hope in its otherwise dreary year-end report. International sales rose 4.5% from 2013, and the chain is looking to add another 15% in fresh retail space this year including new store openings in India and China.

In addition, the firm is also taking a multifaceted approach to future growth through the opening of new stores, franchise establishment, and a massive improvement to its online services. Its drive toward becoming an "international multi-channel retailer" saw sales across its various channels rise an impressive 16.6% in 2013, driven by better online services, which gave mobile and tablet PC sales a 200% leg up.

I expect a transformed, multinational Marks and Spencer to post robust earnings expansion in the coming years, although the company may experience further near-term turbulence in the meantime.

The inside track to hot stocks growth
If you believe that Marks and Spencer still carries too much risk at present, and are looking to significantly boost your investment returns elsewhere, check out this special Fool report that outlines the steps you might wish to take if you are hoping to become seriously rich from other shares.

Our "Ten Steps To Making a Million in the Market" report highlights how fast-growth small caps and beaten-down bargains are all fertile candidates to produce tenfold returns. Click here NOW to enjoy this exclusive "wealth report" -- it's 100% free and comes with no obligation.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2465309, ~/Articles/ArticleHandler.aspx, 8/21/2014 6:44:51 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement