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How to trade the Marks and Spencer share price after FTSE relegation?

Iconic British retailer Marks and Spencer has been battered by a host of negative factors over the past few years: intense competition from food discounters and online fashion sites, the demise of the UK high street, store closures and costly mistakes such as overseas expansion. As a result, the firm’s share price has plunged by 33% over the last 12 months to 195p.

Now, for the first time, M&S [MKS] will be relegated from the leading index of UK shares – the FTSE 100. The change will take effect from 23 September.

 

Downward

The move has garnered a great deal of media coverage, as commentators debate whether this marks another gloomy stage in the terminal decline of the 135-year-old retailer. Its most recent annual pre-tax profit of £84.6m is lightyears away from the £1.1bn profit it recorded in 2007.

It may intensify talk of M&S potentially having to demerge or close either its clothing or food businesses. M&S are already shutting stores nationwide – 100 by 2022 – and retrenching from international expansion into cities such as Paris, as part of a restructuring programme. Other measures include fewer customer promotions. 

Operationally, industry experts expect its retail struggles to continue. Adrian Lowcock, head of personal investing at Willis Owen said: “It is a reflection of the times. High street retailers have been struggling for some time and M&S continues to look for that balance between quality and price.”

There is also some disquiet over its decision to pay £750million for a 50% stake in online grocer Ocado Retail. It gives M&S a presence in the sector and means it does not have to shell out millions on developing its own infrastructure but, as Hargreaves Lansdown points out, it is a lot of cash to pay for a business with £50million of EBITDA.

 

Market cap£3.84bn
PE ratio (TTM)93.17
EPS (TTM)2.10
Quarterly revenue growth (YoY)-2.90%

Marks and Spencer share price vitals, Yahoo finance, 5 September 2019

 

Chairman Archie Norman said it could take between 3 and 5 years for its moves to bear fruit and lead to sustainable, profitable growth.
That is a long time to wait for a share price recovery. Especially given possible headwinds from Brexit. "If there is a further fall in the pound because of Brexit that could hit retailers as they buy many imported goods in dollars. A wider downturn in the economy could also hit M&S,” said Hargreaves Lansdown.

 

Upward

Norman is urging investors to be patient. Referring to a potential relegation he said back in May: “When I went to ITV we dropped out of the FTSE 100 and the sky didn’t fall in. The business was the same business the day after.”

ITV [ITV] is now back in the FTSE 100, as are others who were demoted, such as supermarket Morrisons [MRW]. There is a return ticket for stocks if they can address their issues as M&S is doing. There is also the argument that, like a top football club that has been relegated, it will give them space to make those changes out of the spotlight.

M&S still has strong fundamentals. Its brand name and affection among UK consumers and ex-pats is strong. The firm cut its dividend by 25% to 13.9p in its last results but its annual dividend yield is a respectable 7.28%. 

“When I went to ITV we dropped out of the FTSE 100 and the sky didn’t fall in. The business was the same business the day after.” - Chairman Archie Norman

It’s restructuring plan has cost around £1.4bn to date, but rethinking its store presence, focusing less on discounts and moving into food delivery are meaningful steps.

In the short-term the share price may suffer from some volatility as FTSE 100 tracker funds sell off their M&S holdings. “It is a common strategy for hedge funds to buy a stock before it enters an index and short a stock before it comes out of an index,” Peter Sleep of Seven Investment Management told the Telegraph. “However, I would tell investors to be very careful of index arbitrage, you are swimming with the sharks.”

Instead of diving in you could just relax in your M&S jumper and wait for a potential upside in the FTSE 250.

According to a study from Smith’s Corporate Advisory companies that fell out of the FTSE 100 dropped by almost 19% in the two months beforehand but rose 2% in the period before the change actually happened. They then moved sideways in the following two months.

For M&S it is about the long game going forward. If that did include a demerger of food and clothing, then this could add to shareholder value.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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