FTSE 100 companies are at risk of automatic demotion after a stock market sell-off, but who will replace them? Our City writer looks at these two hopefuls.
Deutsche Bank sees M&S shares reaching 235p, the equivalent of a £4.6 billion market capitalisation and sufficient to end a three-year blue-chip absence. On easyJet, the bank is looking for 635p in a move that would value the low-cost airline at £4.8 billion.
Recent progress means both stocks are now among the top 10 most valuable of the FTSE 250 index, but at £3.7 billion are not in contention for promotion when the next quarterly reshuffle takes place in June based on prices at the closing bell on Tuesday.
The current frontrunner is valves and flow control equipment firm IMI (LSE:IMI), which has a market value of £4.1 billion and could take the place held by M&S’s joint venture partner Ocado Group (LSE:OCDO). Hikma Pharmaceuticals (LSE:HIK) and Diploma (LSE:DPLM) aren’t far behind IMI. And there could be more activity than expected at this reshuffle following the latest stock market volatility. Johnson Matthey (LSE:JMAT), British Land Co (LSE:BLND) and Frasers Group (LSE:FRAS) are currently all at risk of automatic demotion from the FTSE 100.
M&S’s push for top-flight status received a significant boost yesterday when shares jumped 12% on the back of better-than-expected annual profits and plans for the resumption of dividend payments in November after a three-year absence.
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As many as 18 million M&S shares were traded during yesterday’s session compared with the more typical volume of three to four million shares in the days leading up to the results.
Shares closed at just below 185p, the same as the price for the company’s 1-for-5 rights issue in May 2019 when it tapped shareholders for around £600 million to fund the acquisition of a 50% stake in Ocado’s UK retail business.
It’s been a rocky ride for loyal investors since then, with shares dipping below 100p in the early days of the pandemic in 2020 and then again last autumn after the UK’s mini-budget.
Turnaround fatigue hasn’t helped the investment case in recent years, but after several false dawns analysts are now starting to feel more positive about a sustained recovery.
Deutsche Bank’s Adam Cochrane is among them after raising his earnings forecasts for this financial year by 10% and 3% for the next, lifting his target price by 25p in the process.
He said today: “The proof of the turnaround pudding is in the tasting. In an undisputedly tough retail environment, M&S beat on both sales and profits for its fourth quarter and was confident enough to deliver unabashedly bullish guidance for FY24.
“We believe that this is largely driven by M&S products resonating with consumers in both clothing and food – and supported by the investments made in stores, online and the supply chain.”
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M&S shares are up around 50% year-to-date, but Cochrane believes a return to like-for-like growth, tough decisions on costs and a balance sheet heading back to investment grade should see investors revisit the investment case.
Goldman Sachs also raised its price from 180p to 220p following the results, while Peel Hunt yesterday said the profits upgrade should help the valuation multiple to widen from a currently single digit price/ earnings level.
The outlook for M&S continues to be tempered by economic uncertainty, particularly with UK interest rates still rising and holders of Covid-era mortgages facing a payment shock when their deals end during this year.
The same threat hangs over the recovery of easyJet, whose shares have risen by around 50% this year as the industry gets set for a strong summer of passenger demand and sees a fall in fuel costs.
The progress by the airline, which recently reported a much smaller half-year loss, means shares are now well clear of the 410p seen in a rights issue in September 2021.
Deutsche Bank believes the shares can reach 635p after today upping its price target from 610p. The upgrade follows a £66 million increase in the bank’s full-year profit forecast to £436 million, driven by a lower-than-expected fuel bill and greater profitability from the company’s holidays segment.
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