BofA Merrill Lynch upgrades Marks & Spencer to ‘buy’

Bank of America Merrill Lynch upgraded Marks & Spencer on Friday to ‘buy’ from ‘neutral’ as it argued the stock is still too cheap and consensus earnings too low.

The bank said that despite the stock’s outperformance year-to-date, it believes that M&S remains mispriced and sees potential for upward earnings revisions.

"Our revised EPS estimates are 5% above consensus over FY24-27E supported by higher margin expectations," it said.

Bank of America said its new price target of 300p, up from 197p, is driven by its increased earnings estimates and a 70 basis points lower WACC (weighted average cost of capital) assumption.

BofA ML said M&S is delivering on its turnaround and closing its performance gap to peers. Yet, it continues to screen as one of the cheapest stocks amongst peers across several valuation metrics based on its estimates - 10x FY25E price-to-earnings (peers 12x), 1.1x EV/ROCE (peers 2.0x), free cash flow yield 10% (peers 8%).

"If we apply peer multiples to M&S Food, current shares imply an 8x FY25E P/E for the C&H (Clothing & Home) business - too low in our opinion considering market share gains and better brand heat."

ML also pointed to the fact the UK consumer backdrop is showing some signs of improvement, and said this could support consumption and sentiment for consumer discretionary equities.

"Real wage and disposable income growth has inflected, and consumer confidence is recovering. This could be further supported by the recent pivot in UK interest rate expectations. A softening labour market and elevated mortgage rates remain key risks, however," it said.