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3 reasons why Marks and Spencer shares could be undervalued

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Over the past year, the Marks and Spencer (LSE:MKS) share price has fallen by 32%. A good amount of this move has happened within the past six months. However, with upbeat full-year results from earlier this year, I think there’s plenty to be positive about. Here are a few reasons why I think Marks and Spencer shares are becoming undervalued.

Overdone inflation concerns

I think one reason why the share price has fallen in recent months is concern around inflation. As a business that sells to the retail consumer, it’s very sensitive to price rises. This will be felt not only in the food division, but also in the clothing and home space.

However, I think that the business will be able to ride out this wave better than people might expect. For example, in the full-year results it highlighted that 82% of sales in clothing and home were made at full price.

The business might lose some customers to cheaper competitors in the coming year, but I think the above statistic helps to show that price might not be the biggest thing that Marks and Spencer shoppers think about. I think the share price doesn’t reflect this optimism given the recent sell-off.

Using traditional valuations

Another reason why I think Marks and Spencer shares look good value is the traditional price-to-earnings metric. The business recorded a profit before tax of £391.4m for the year ended in 2022. Given the corresponding earning per share and the last closing share price of 126p from yesterday, it means the P/E ratio sits at 5.84.

Anything below 10 is a number where I start to think that the business is undervalued. Of course, I do need to be careful that a very low number might just be the result of nobody wanting to buy the shares! But for Marks and Spencer, the latest financials were up significantly from the previous year. With the earnings component strong, it leads me to conclude that it’s the low share price that’s contributing to the low P/E ratio.

A bright outlook for Marks and Spencer shares

Finally, I think the long-term outlook for the company is better than is currently being priced in. The business isn’t a dinosaur and is transforming at pace. For example, it’s closing several stores that aren’t in line with its strategy and aiming for new store openings have payback periods of around 1.5 years.

The joint venture in India, along with strong demand in the Middle East, highlight to me that the firm is focused on growing into international markets sustainably.

As a long-term investor, this ticks the boxes for me of a potentially undervalued stock right now. In the short term, I acknowledge that the share price could fall further. It’s in a downward spiral that could continue, especially if bearish investor sentiment is maintained. Yet this doesn’t overly concern me, as I’m happy at the current price to dip my toe in the water. On that basis, I’m considering buying the stock now.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.