September 16, 2019

‘Mark’ the Date: Marks & Spencer to Exit FTSE 100

by Tajinder Dhillon.

In another indication that brick-and-mortar retailers are suffering, British retail icon Marks & Spencer will be dropped from the FTSE 100 stock index on Sept. 20.  FTSE Russell, in its quarterly review, announced that M&S, Direct Line Insurance Group and Micro Focus International will leave the index.  For M&S, this will mark the first time it has exited the FTSE 100 since being a founding member of the flagship index which was created in 1984.

A fun fact: Using data going back to 1994, of the original 101 constituents in the index, 61 are no longer public actively traded securities (excluding the impact of subsequent corporate actions).

Since Marks & Spencer achieved a peak market cap of £19.0 billion in October 1997, it has faced an uphill battle against online shopping, reviving its clothing segment and being more competitive in grocery.  Revenue growth over the next three years is expected to be flat and FY 2020 EPS estimates have been revised downward by 25% over the last year, according to I/B/E/S data from Refinitiv.

Exhibit 1 looks at how FTSE 100 constituents have grown in market cap over time.  This table ranks the lowest 10 by market cap change.  Note that timeframes between companies differ, depending on their “base dates.”  Marks & Spencer demonstrates a sub-par growth of 40% over the nearly 36 years as a publicly-listed company, ranking 95th out of the current FTSE 100 constituents (Note: there are 101 constituents).  This is equivalent to an annualized growth rate of 1.0% which is well below leading companies WPP, Antofagasta, and DS Smith.  Albeit having a much smaller market cap compared to M&S at their respective base dates, this group has experienced annualized growth rates of 30.0%, 23.8% and 22.5% respectively as publicly traded entities over the same time period.

Exhibit 1: Change in Market Cap for FTSE 100 Constituents

Looking ahead

Direct Line Insurance Group also falls out of the FTSE 100 after approximately five years.  It is worth mentioning that Micro Focus International, the third constituent to leave, has demonstrated exceptional growth since its IPO.  It increased its market cap by more than 10 times since 2005 but remains the smallest company in the FTSE 100 with a £3.7 billion market cap.

Looking ahead, Exhibit 2 shows 10 constituents, including three founding members, that could face an exit from the FTSE 100 in the next quarterly review.  Rules for inclusion/exclusion are based on market cap size and relative positioning.  Other British supermarkets facing a similar fate as Marks & Spencer, including WM Morrison and Sainsbury.  All three companies have significantly underperformed the FTSE 100 in the last year, with Sainsbury shares dropping 33.4%, while Morrison and M&S declined 27.4% and 26.5% respectively.

Exhibit 2: Possible Candidates to Exit FTSE 100 at Next Quarterly Review

New index members

Moving on, let’s briefly look at the new entrants into the flagship index which include Hikma Pharmaceuticals (HIK.L), Meggitt (MGGT.L) and Polymetal International (POLYP.L).  All three companies are not new to the FTSE 100, having appeared previously at least once in the index.  Meggitt and Polymetal International were last seen in December 2015 and 2016 respectively, while Hikma Pharmaceuticals left the index in the prior FTSE Russell quarter review.

We analyzed the new joiners using the StarMine Analyst Revision Model (ARM) — a stock ranking model that is designed to predict changes in analyst revision sentiment.  Future revisions are positively correlated with price changes, so this will be useful information for active investors.

Ranking companies on a percentile basis from 1 (worst) – 100 (best) vs. its peers on a regional basis (Developed Europe in this example), all three new joiners have positive scores above 80, which is a strong signal that analysts are bullish.

Exhibit 3 demonstrates how Meggitt FY 2020 EPS estimates have consistently been revised upwards.  The SmartEstimate is indicated in gold which gives a higher weight to analysts who have historically been more accurate and timelier.

Exhibit 3: Estimate Revisions for Meggitt

Possible upside surprise

Comparing the SmartEstimate to the consensus estimate in purple, we can see that the percentage different between the two, a measure the research team that created the SmartEstimate calls “Predicted Surprise,” is 1.60%.  This indicates one of two things – first, analysts are more likely to raise their estimates in the direction of the SmartEstimate, which will lead to upward revisions, and second, there is a higher probability that Meggitt will surprise to the upside when it next reports earnings.

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