Is It Still Safe to Buy Marks and Spencer?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market could be overheating.

So right now I'm analyzing some of the most popular companies in the FTSE 100, hoping to establish if they can continue to outperform in today's uncertain economy.

Today, I'm looking at retail giant Marks & Spencer to determine whether the shares are still safe to buy at 469 pence.

So, how's business going?
Marks & Spencer has outperformed the market recently as investors continue to weigh up the possibility that the company could become a takeover target.

However, while the company's shares have been outperforming, on the ground the 129-year old firm has been struggling to compete in the U.K.'s ferocious retail market.

In particular, Marks & Spencer reported last week that its profits for 2012 had fallen back to a level not seen since 2009. In addition, it is struggling to reverse seven straight quarters of declining clothing sales within its home market.

Furthermore, these poor sales figures come two years into a three-year, 2.4 billion-pound turnaround plan aimed at revamping the retailer's stores and expanding overseas.

That said, the company's management remains upbeat and forecasts an "underlying profit improvement" for the 2013-2014 year. However, some analysts remain doubtful and believe that the retailer has lost support from its key clothing customers.

Expected growth
Unfortunately, while the company's management remains upbeat about the future, many City analysts expect Marks & Spencer's earnings growth to remain sluggish for the next two years. City forecasts currently predict earnings of 33.5 pence per share for 2013/2014 (3% growth) and 36.8 pence per share for the year after.

Shareholder returns
Marks & Spencer has a checkered dividend history as the firm has slashed its payout twice since 2000. That said, it currently offers a dividend yield of 3.5%, larger than that of its peers in the general retailers sector.

In addition, after keeping its dividend steady at 17 pence per share for the last three years, many City analysts expect the company to begin increasing its payout again next year. City forecasts expect a dividend of 17.9 pence a share for 2013/2014 (5% rise) and 19 pence a share for the year after.

Surprisingly, despite Marks & Spencer's falling profits and struggling sales, it trades at a premium to its peers. It is currently valued at a historic P/E of 16.6, while its peers trade on an average historic P/E of around 15.8.

Foolish summary
While the general market remains positive about Marks & Spencer, I do not share the same optimism. So, based on the company's struggling sales and high valuation in relation to its peers, overall, I feel that Marks & Spencer does not look safe to buy at 469 pence.

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Rupert Hargreaves does not own any share mentioned in this article, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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