Brokers believe the ‘worst is over’ for M&S share price

Investec reiterated its buy advice on M&S on Tuesday, arguing investors are underestimating its potential to benefit from self-help and make market share gains.

Last week Singer changed its stance from sell to fair value. The broker said M&S’s share price had underperformed the All-share index by 20% over the past three months but believes “the worst is over”.

Investec analyst Katharine Wynne cut her full-year profit forecast for M&S from £725m to £710m and expects its general merchandise sales to be down almost 4% in the fourth quarter.

Retailers have been caught in a pincer movement of rising costs as well as lower consumer disposable income. Wynne noted there had been no evidence of “blanket price moves” by M&S, that in many cases price increases have been tied to a quality or fashion upgrade and that M&S’s larger volumes “tend to be at price points above the entry level.”

She said: “Notwithstanding the share price vulnerability to poor sentiment on the sector’s prospects, we think a potential top-line recovery driven by market share gains, favourable demographic bias - less exposed to the ‘squeezed middle’ - and improved margin management is in prospect for 2012 and beyond.”

Singer analyst Matthew McEachran edged back his current year forecast to £695m. He maintained: “Although there could yet be downside risk to forecast assumptions due to weak demand and heightened raw material costs, the new team is working on an improved forward strategy and yet to communicate the full economic effect of increased investment.

“We are therefore inclined to say most of the bad news is now adequately factored into the share price and a further leg down in the share price is harder to envisage, barring wider equity market weakness.”

Following last week’s sales update from Primark, showing a cooling trading climate, the British Retail Consortium reported on Tuesday that sector like-for-likes fell 0.4% in February.

The BRC numbers prompted brokers to take a bearish view of the retail outlook. Peel Hunt analyst John Stevenson expects March trading to be subdued too.

He said: “We believe the gap between winners and losers is set to become a gulf this year, with fewer retailers offering structural growth and opportunities for clear profit growth.”