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Top brokers and banking research teams publish price forecasts for different FTSE 100 stocks. These are updated every two months (or when something important happens that requires a review). With some stocks outperforming, there are times when analysts can't raise the forecast fast enough. Here is a case that I have detected.
Looking at price targets
Marks and Spencer (LSE:MKS) has recently climbed back into the FTSE 100 thanks to its strong growth. The share price is up 57% over the last year, with a market capitalization of £5.25bn. The stock is currently trading at 257p, having been rising for quite some time.
Analysts have been trying to keep pace with earnings and determine how high they could go next year. For example, this time last year, Invertec It had a price target of 180 pence. This rose last summer to 275p and then again earlier this year to 316p! The current target is 320p.
Another case is J.Morgan. Last year, the research team had a price target of just 150p around this time. However, the team has been playing catch-up for quite some time. Earlier this month, they raised their price target to a whopping 330p for next year.
Of course, I must take these predictions with caution. If I had believed in the above targets, I would have sold the stock long ago at much lower levels! This shows that even professionals can underestimate how high a stock can go.
Why business is good
The fact that forecasts have been eclipsed over the past year shows how well the company has done. It is true that financial performance has exceeded estimates, particularly during a period when the UK high street is generally underperforming.
In the last January update on Christmas trading, group sales were up 7.2% on the previous year. Excluding the disappointing international business, UK sales grew by 8.5%. This growth came from all divisions, from Food to Apparel and Home. This shows me that the company is not dependent on one part to carry out the entire group. Rather, it's firing on all cylinders.
Looking ahead, I agree with some of the major banks that 300p could be reached next year. The price-earnings ratio at 257p is 14.13. Although it is above average, it is certainly not overrated. If profits grow over the current year by 15% to 20%, then, assuming the ratio remains the same, the share price should end up at 300p.
UK Consumer Tracking
I note the risk that the UK consumer may not have much disposable income at the moment. If interest rates remain high and we get another quarter of negative GDP growth, people could start cutting spending.
Even with that risk, it's clear that Marks & Spencer has growing market share. This should help you minimize any potential drop in demand. I like the stock and am thinking of buying it for more profit.
