Perpetual's Neil Woodford has just bought into Marks & Spencer for the first time in his career as a...
Perpetual's Neil Woodford has just bought into Marks & Spencer for the first time in his career as a fund manager.
He now has 1.3% of the Higher Income unit trust in the stock as a recovery play although his colleague Stephen Whittaker does not own any for his UK Growth fund.
Woodford said: "I have never owned M&S until recently. I have always believed it was massively overvalued. Its share price recognises this fact and is now 20% of its market peak."
Woodford believes the company is beginning to turn around its fortunes and is more robust than the stock market as a whole believes.
He pointed out that while the brand was suffering there were as many people going into M&S branches as ever and turnover remained similarly unaffected.
Woodford added: "It has suffered from a margin collapse."
He identified three areas where the company needed to improve to turnaround its fortunes. The first of these is in its buying policy, in particular its past practice of buying British, a strategy it is now changing.
Woodford said: "This policy was nonsense and margins were massively impaired as was quality. It will take time for them to establish quality relationships with suppliers elsewhere."
He added this was a factor highlighted by Simon Wolfson, managing director of Next, as a crucial one to get right. This is because retailers need suppliers who can respond rapidly to provide large numbers of goods which a fashion conscious audience craves.
Woodford believes M&S is well on its way to achieving this first objective but still needs to put in place a new cost structure and get the right clothes in the stores
Woodford said: "You have to remember what is in the stores today reflects decisions taken nine months ago. That is before George Davies (the former Next and Asda clothing designer) was brought in."
Woodford estimates that the share price of M&S could go as high as £5 if its stores can start to supply the right products and customers respond positively. As of 30 March the share price was £2.66 and it was trading on a P/E of 22.5 times.
This follows the group's announcement that it was shedding its overseas operations to concentrate on the UK market.
Within the UK retail sector one of Woodford's favoured stocks continues to be Next, which announced results on 22 March for the second half of 2000 showing a 10% profits rise.
Woodford said: "Next is a high quality business with high quality management. It is not overexpanding, it is growing its floor space in a measured and balanced way.
"I think the stock can go to £10 and be on 20 times earnings and that is appropriate for a fashion retailer which is doing very well."
As of 30 March Next's share price stood at £8.81 and was on a P/E of 18.6 times.
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