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 (MKS 1.40%) 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.
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