Head To Head: M&S vs B&Q

Published in Investing on 8 October 2012

Which blue-chip retailer should you buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are retailers Marks and Spencer (LSE: MKS) and B&Q-owner Kingfisher (LSE: KGF).

The UK economy continues to struggle, consumers remain under the cosh, and the shares of M&S and Kingfisher have underperformed the FTSE 100 over the past six months.

The FTSE 100 is up 2% over the period. M&S's shares, despite having been bolstered by talk of a private-equity bid for the company, are only up 1%, while Kingfisher's shares have fallen 12%.

Let's take our seats at ringside.

Round 1: earnings

Recent share price369p269p
Last year price-to-earnings (P/E) ratio10.610.7
Current-year forecast P/E11.011.7
Four-year earnings per share (eps) compound annual growth rate (CAGR) (%)-524
Current year forecast eps growth (%)-4-8
Operating margin (%)7.57.2

Sources: Digital Look, Morningstar, company reports. Winners in bold.

M&S starts strongly, taking four points to Kingfisher's one. Kingfisher's one point, for vastly superior historic eps growth, tells of its strong bounce back from the 2008-09 recession. Both firms are expected to see negative eps growth in the current year, with a record wet summer being behind Kingfisher's forecast reversal.

Round 2: dividends

Last year dividend yield (%)4.63.3
Current-year forecast dividend yield (%)4.73.5
Four-year dividend CAGR (%)-75
Current year forecast dividend growth (%)26
Forecast dividend cover1.92.5

Sources: Digital Look, Morningstar, company reports. Winners in bold.

M&S starts round two strongly taking points for its superior dividend yield. However, Kingfisher fights back with stronger growth numbers and snatches the round on better dividend cover.

Round 3: balance sheet

Price-to-book (P/B) ratio2.71.9
Net gearing (%)753

Sources: Digital Look, Morningstar, company reports. Winners in bold.

Kingfisher finishes the contest strongly, taking both points in the final round, giving the B&Q owner a two rounds-to-one victory over M&S. However, the companies are all square when it comes to the overall points tally, which is six points apiece.

Post-match assessment

There were some big swings round-to-round in this contest, with the companies each winning one round very convincingly, sandwiching one close-fought round. Nevertheless, at the end of the day, M&S and Kingfisher proved to be equally matched.

It's worth noting, though, that while Kingfisher was generally stronger on fundamentals -- such as earnings and dividend growth -- M&S took four of the five valuation-ratio points, suggesting the high-street stalwart might just be better value than Kingfisher at the present time.

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> G A Chester does not own shares in any of the companies mentioned in this article.

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Tykethat 08 Oct 2012 , 8:02pm

Balance sheets are all well and good but intrinsically are an historical/present day record.

What about the future? Have you been in an M&S lately?

It depends VERY HEAVILY on womens fashion for its profits....
Ignore the dine in for a tenner, great promotion but makes little margin, it exists as a footfall gatherer, which it succeeds at.
The womens fashion is the worst it has been in my retailing memory (30 years experience)
presentation is hopeless, the lines that sell are unavailable, leaving the stuff that nobody wants behind.

This situation cannot be gleaned from a balance sheet, the best tool for investment is open eyes and listening ears!

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