M&S among retail stocks on this ‘buy’ list

An upgrade to the UK growth outlook today kept Marks & Spencer Group (LSE:MKS) shares in focus after this week’s backing for the retailer as one of a City bank’s two top picks.

UBS initiated M&S coverage on Monday with a Buy stance and price target of 435p, representing a further 15% upside on this afternoon’s 377.4p and a level last seen at the end of 2015.

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The shares have risen 11% in the past month and by 53% since April as the reshaped retailer’s progress in food and in home and clothing is complemented by the UK’s wider recovery.

This was highlighted earlier today when the OECD upped its growth estimate for this year to 1.1% from 0.4% seen in May, representing the largest revision among G7 countries.

UBS this week noted the potential consumer spending impact of the UK’s growth in real wages, which at 2.9% compares with 2.1% in Europe and 1.3% in the US.

Its research anticipates the release of pent-up demand after a period of high prices and mortgage rates, although a 16% rally for UK discretionary stocks over the past three months means capturing the likely winners has become harder.

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In this context it is backing structural market share winners, particularly where mid-term earnings upside is not priced in. Alongside M&S, its other top pick in the sector is Tesco (LSE:TSCO).

UBS identifies the themes of rising capital expenditure, digital growth and productivity gains as key to helping strong companies to become stronger.

On M&S, the bank believes the market is only factoring in its near-term momentum and that the retailer’s structural outperformance is likely to be more visible at half-year results on 6 November and a capital markets event on 12 November.

M&S trades on 13 times the bank’s forecast earnings or 10.5x excluding its Ocado food joint venture. As this compares with Next (LSE:NXT) on 16 times and Tesco on 14 times, UBS suggests there’s room for re-rating with continued execution.

The coverage also upgrades Dunelm Group (LSE:DNLM) to Buy, noting its consistent market share gains since 2017. With its strong customer metrics and competitive pricing, the bank regards the homewares chain as a structural winner in a fragmented sector.

It has a target of 1,410p,  an upside of 20% that compares with 1,140p on Monday when deputy chair Will Adderley cut his family’s shareholding to 37.6% in a £114 million share placing.

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The bank also believes the shares of Domino's Pizza Group (LSE:DOM) are attractive at 298.8p.

It has a price target of 380p, believing that the delivery firm’s scale as the UK’s largest operator, its digital strength and the best franchisee profitability among global peers point to market share gains when growth returns in the second half.

Among other changes, Kingfisher (LSE:KGF) is raised to Neutral as enthusiasm towards the B&Q owner’s position in a UK house market recovery is held back by weak France trading and a 35% rally for the shares in the last three months.

On B&M European Value Retail SA (LSE:BME), UBS has started its coverage at Sell due partly to diminishing price gaps with supermarkets Sainsbury (J) (LSE:SBRY)’s and Tesco.

It said: “The weak year-to-date share price does not fully reflect the near-term headwinds or potential mid-term concerns, in our view.” The shares are valued at 390p, which compares with this afternoon’s 413.7p and the 551p seen in early June.

Tesco shares are backed to advance 9% to 400p, but the bank regards Next as fully valued after a run of profit upgrades that’s driven the FTSE 100 stock to a record high.