Sir Richard Greenbury sprang to the defence of Marks & Spencer yesterday by questioning the sanity of the City. As M&S shares tumbled to an eight-year low of 227p, the retailer’s former executive chairman said: “They couldn’t tell the difference between Shergar and a milk float.”

The comparison may be unfortunate, given that Shergar, arguably the most famous Derby winner of them all, is more memorable still for disappearing shortly afterwards, but Sir Richard is a firm believer that M&S’s low share price proves that panic is driving every emotion in the Square Mile as the credit crunch hits the high street.

Just as odds at a racecourse rate the prospects of a horse, a company’s price-to-earnings (p/e) ratio reflects its prospects on the stock market – with one vital difference, the higher the better. The carnage caused by M&S’s profit warning on Wednesday has pushed the p/e ratio for the general retail sector to 7 – the lowest level since records began in 1968. At the start of the week it had been at the lowest since the end of 1974.

M&S is trading on a historic p/e of 5.3; its share price is only five times its last reported earnings per share. This is the lowest since the 1960s and less than half the valuation put on Mothercare, WH Smith and HMV, despite the fact that M&S could report pretax profits of £700 million next year.

The worrying news for investors is that analysts believe that life could get worse for retailers (which have had the stuffing knocked out of them over the past year as it is), given that nobody is quite sure just how bad 2009 and even 2010 could be. At the start of the week, Debenhams shares were trading 68 per cent below their level of a year ago, Kingfisher and Next 54 per cent, yet it is almost impossible to find many buyers.

Tony Shiret, the Credit Suisse analyst who predicted the downturn in fortunes at M&S, said yesterday that Next was the one stock he would back at the moment. “Because it’s the one that won’t explode.”

The Qatari Investment Authority’s gentle stakebuilding in J Sainsbury could yet trigger a rally across the sector, as could a successful takeover of Somerfield by the Coop, but one comment about M&S this week suggested how bad the outlook is. Sir Stuart Rose, the group’s executive chairman, said that he was dismissing Steven Esom as director of food because he needed a “different horse for a different course”.

Asked whether the low M&S share price made the group a bid target, a private equity executive replied: “I think we will let this horse bleed a while yet.”

Nevertheless, M&S is likely to fall much further only if Sir Stuart decides he’s had enough and walks away. Those with a head for risks could do well by backing a recovery now, but for the rest – and the rest of the sector – the group’s best avoided at the moment.

Avoid Pendragon as the brakes go on

Out on the British garage forecourt things are not quite as bad as they are in the US or in parts of Europe. But they are getting worse and are unlikely to show any improvement this year.

Pendragon, the UK car dealership, had little optimisim on show yesterday when it revealed that it would have to cut 500 jobs and said that it was difficult to call the market. Pendragon’s warning came as the Society of Motor Manufacturers and Traders reported its sharpest monthly drop in new car sales so far this year and as the trade body outlined concerns over the double-whammy of rising inflation and falling GDP growth.

Selling cars can be tough at the best of times but shifting them amid general economic uncertainty, limited finance for potential customers and an escalating oil price is a Herculean challenge.

The SMMT said that new car sales had dropped 6.1 per cent overall. But within this total lie worrying break-out figures. Sales of private new cars fell 9.5 per cent and purchases of small business vehicles plunged 15.4 per cent. If one looks at sales for luxury vehicles there are dramatic falls of between 30 per cent and 50 per cent.

And the downturn in new vehicle sales will be mirrored, though less starkly, in the market for used cars. Pendragon, like other dealerships, makes its best margins from the private and business market. The carmakers are already fighting hard with each other in terms of incentives for increasingly reluctant customers. There seems little that dealerships can do to try to pep up the deteriorating market.

Pendragon, which operates 400 dealerships in the Evans Halshaw and Stratstone retail chains, is also highly exposed to the British market, with 95 per cent of its sales based here. Its geographical footprint contrasts with some of its rivals, such as Inchcape, which are active overseas and can offset decline in the UK with booming markets in Russia, Eastern Europe and China. Pendragon has a handful of dealerships in the US. But that market is bearing the brunt of the global credit squeeze.

This week Merrill Lynch cautioned that things were so bad that General Motors risks bankruptcy if the market continued to fall and if it couldn’t secure additional capital. The world’s biggest carmaker has resorted to offering six years’ interest-free credit to lure punters into the showrooms.

Pendragon triggered a sharp fall in its share price when it warned yesterday that the current downturn in sales could continue in line with further slowing in the economy.

There seems little that can counter that. Avoid.

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