Theres one stock Im more positive on than most for 2017 and thatsMarks & Spencer (LSE: MKS). It has been a rough year for Marks. The company has continued to struggle to retain customers, and despite the publication of its massive business overhaul plan, the market still doesnt seem to believe that the company will ever return to its former glory.
However, I believe that sentiment towards M&Sis so negativethat any positive news from the company will spark a massive rally in the shares.
Down but not out
Shares in the firmhave fallen 22% year-to-date excluding dividends. At one point in the year, the shares dipped below the key 300p level, a thresholdnot breached since 2009.
These declines have pushed M&Ssvaluation down to just 12.1 times forward earnings, which is one of the lowest valuations ever awardedto the group. Granted, itdoes deserve to trade at a low earningsmultiple considering current City forecasts for growth. City analysts expect the groups earnings per share to decline 17% for the year ending 31 March 2017, although with the crucial Christmas trading period still to come, these forecasts are likely to change over the next few months. Whether for better or for worse remains open to question.
So, what could be the catalyst that sends theshares higher by as much as 50% over the next 12months?
Well for a start, if the company can meet or beat the Citys low expectations, investors could start to change theiropinion of it. Secondly, management needs to reassure investors that thedividend payout is sustainable. If Steve Rowe and his teamcan meet this key goal, income investors will return to the shares, pushing the price higher and the yield lower.The five-year average yield for M&Sshares is 4.1% and at this yield, the share price would be 460p, 30% above current levels.
The third factor that could see theshares re-rate is cash flow. In business, cash is king and those companies that can generate hefty amounts of cash year after year are usually the best investments.
The M&S business is a cash cow. Free cash flow per share is 34p on a trailing 12-month basis and usingthis metric, the shares are currently trading at a price-to-free cash flow levelof 10.1, significantly below the industry average of 16.4. If theshares re-rate to a more suitable valuation, they could be worth as much as 550p, a full 57% above current levels.
So overall, shares in the retail giantappear to be undervalued after a punishing year for the company. However, there are now many catalyststhat could push the shares higher including the return of income hunters, better than expected trading performance and bargain-hunter buying.
If any of these scenarios unfold next year, shares in M&Scould easily return to previous highs. But that is, of course, a big if.
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