Marks & Spencer
Marks and Spencer Group is a retailer of clothing, food and home products in the United Kingdom. The Company has 622 stores, including Simply Food franchise stores, as well as an international business.
Marks & Spencer – Could sparks fade in 2009?
As suggested last week the index struggled to break key resistance at 4600.
As can be seen from the above chart of the FTSE 100 the index gained an impressive 25% in seven trading sessions from the lows of 3666 on the 27th October.
The anticipation of further global interest rate cuts and an improvement in the financial system liquidity issues aided the market to look beyond the escalating recession fears. Furthermore, the euphoria surrounding the Obama election as US President fuelled the bulls and perhaps caused global indices to bounce to far and too quickly.
The conclusion of the Presidential elections coincided with the FTSE testing key resistance at 4600 and as the elation subsided, profit taking started to emerge.
Investors now have to decide if market falls of almost 50% from the 2007 multi year highs is enough to price in a sizable recession ahead.
November’s radical interest rate cuts by the Bank of England to 3% from 4.5% and the European Central Bank to 3.25% from 3.75% will tempt longer term investors back into the market as the outlook starts to improve.
Technical analysis of the above chart suggests the recent rally may have run out of steam. Major resistance at 4600 held and the stochastics have rolled over, with the faster stochastic declining from overbought territory. The relative strength index (RSI) also failed to conclusively break through the 50 level, which suggests there could be more selling pressure to come.
The recent sharp gains have resulted in fairly drastic selling and there could be further weakness to come in the short term. However, recent action from central banks should support the weakness. Therefore, minor support is seen at 4200 and 4000, with the recent lows likely to provide a base over the medium term.
Interim results from two of the UK’s largest retailers, Marks & Spencer and Next, helped the general retail sector to rally around 10% in the past week. Marks & Spencer (Epic: MKS) reported first half results on the 4th November, which on the surface came in better than analysts expected.
Pretax profit for the six months ended 27th September 2008 stood at £307.8 million versus £550.1 million last year, which was above the markets expectations of £290 million. Even though, increased input costs and a tougher retail environment led to lower than expected gross margins, as increased promotional activity was implemented to stimulate demand.
Fears of a reduction in the dividend have been dominating the negative sentiment surrounding MKS over recent months, although they maintained the interim dividend at 8.3p and stated that they have no plans to lower it unless conditions deteriorate further.
However, the outlook remains extremely cautious, with MKS chairman Sir Stuart Rose, stating “Market conditions and consumer confidence declined through the half, leading to reduced profits year on year, due to lower sales and investment margin.”
It is worth noting that these results covered the group’s performance until the end of September. However, Rose also said “trading throughout October has been volatile with recent events in the financial markets and their impact on the wider economy further weakening consumer sentiment.”
Therefore, with what could potentially be the worse Christmas trading period for some time and Octobers deteriorating consumer sentiment, investors fears will again escalate that the current dividend may not be maintained.
It is hoped that the recent dramatic rate cuts from the Bank of England will eventually filter through to consumer’s discretionary income and benefit the retailers. Furthermore, a 2% reduction in the base rate over recent months will reduce interest payments on MKS’s net debt, which could save the group nearly £50 million next year.
As can be seen from the above chart of the MKS the shares have fallen around 65% from the highs experienced in April 2007. The 50 day moving average crossed through the 200 day moving average to the downside in July 2007 and the shares have been in a steady downtrend since.
However, the recent rally in global equities combined with the group’s results has caused the shares to bounce over 30% in the past two weeks.
As a result, the oscillators have moved into overbought territory, with the relative strength index (RSI) trading at 12 month highs. The stochastic is also suggesting the stock is overbought, with the faster stochastic starting to decline from recent highs.
If we combine our earlier analysis of the FTSE with the weak fundamental and technical analysis discussed about MKS, I believe the recent strength could present a good opportunity to short sell into.
At the time of writing the share price is 252.75p and I am looking to build a short position in MKS closer to resistance at 260p. Near term targets are seen at 246p, 234.5p and 215p. I shall set a stop loss on the trade marginally above recent resistance at 274.5p.
Mark Allen is Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in MKS. The material in this report has come from Fidessa, Share Scope and Marks & Spencer’s corporate website.
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