M&S Shares Eclipse Ocado’s in This Year’s Reversal of Fortunes

(Bloomberg) -- Shares in Marks & Spencer Group Plc have staged a comeback this year, signaling a reversal of fortunes between the U.K. retailer and its joint venture partner Ocado Group Plc. 

M&S shares are on track for their biggest annual gain since 2009, rallying 73% amid signs of recovery as the High Street stalwart increased its profit outlook twice this year. More gains could be in store during 2022 for a stock still down 59% from its 2015 peak. 

Attractive valuations on the 137-year-old retailer may help spur the advance: M&S shares trade at 12.5 times estimated earnings, compared with 15.3 times for the FTSE 350 Retailers Index and 20 times for the Stoxx 600 Retail Index.

Meanwhile, Ocado’s stock has lost more than a quarter of its value in 2021 and is set for its worst annual decline since 2011. M&S has a 50% stake in Ocado’s retail business, though the British online grocer’s valuation is largely based on expectations that the company can expand its licensing of robotic warehouse technology to retailers around the world.

M&S has “seen a huge turnaround in its fortunes this year,” with sales through Ocado accounting for 27% of revenue for their joint venture, Michael Hewson, chief market analyst at CMC Markets UK, said in emailed commentary this month. As for Ocado, “we have seen the benefits of this deal in its quarterly revenue numbers, however the progress on last year has still been disappointing.”

Shares in companies focused on e-commerce that prospered during last year’s lockdowns have suffered this year as stores reopened. Clothing retailers Asos Plc and Boohoo Group Plc have dropped by more than half in 2021, with M&S’s market capitalization overtaking them both in September. 

Still, analysts tracked by Bloomberg only see M&S shares rising about 4% on average over the next 12 months.

“The market is already pricing in some benefits from the structural improvement in operational segments,” UBS Group AG analyst Sreedhar Mahamkali wrote in a note this month, downgrading its rating to neutral from buy. “Further re-rating is limited by strong macro headwinds into next year.”

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