B&M European Value Retail: Index Inclusion Is A Further Spur To Share Price Growth (OTCMKTS:BMRPF)


U.K. discount retailer B&M European Value Retail (BMRPF) has had a good year. At 460p, the shares are about 17% ahead of what they were when I recommended them in my June piece on Seeking Alpha, “Well-Poised Retailer For A Reopened U.K.: B&M European Value Retail.” They have recently tested higher levels, getting to 498p at one point. 500p may be a resistance point for now.

However, there is an upcoming stream of good news, which I think will help propel the shares higher.

FTSE Membership Will Help the Shares

It was announced that B&M will enter the FTSE-100 index of leading U.K. companies. The change will take effect from September 21.

First, it is worth noting that this in itself is a sign of a company in the ascendancy. The index is basically the hundred highest-capitalized listed companies on the London board. So, as with other such indices, getting added into it is indicative of a company whose capitalization is increasing, while falling out of it reflects a reversal of fortunes on that score. B&M will be replacing broadcaster ITV (ITVPF, ITVPY), which has been having a hard time of it in recent years.

As part of the index, there ought to be more buying by index tracker funds who buy the index components.

Academic research found that stocks exhibit positive abnormal long-run performance following their inclusion in the FTSE-100 index. The researchers also found that shares benefitted from short-term cumulative abnormal returns around the time of the promotion to the index. They speculated that that may be due to the aforementioned purchasing by index tracker funds, but the evidence for that was inconclusive. In any case, both short term and long term, inclusion in the index was positive for the share price.

Shares Will Have Additional Momentum Aside from the Index News

As I outlined in my piece “B&M: Strong Earnings Guidance Is A Clear Buy Signal,” the company has already guided the market to expect a near-doubling of adjusted EBITDA for the current six-month period, which ends on September 26.

I think some of that has been reflected in the run-up in shares of late. They have had a good year so far and despite some recent falls, the trend over the past several months has been clearly upwards.

Source: Google Finance

That is indicative of the fact that the company’s barnstorming performance during the COVID-19 pandemic is not only impressive in itself, it is also impressive when set against the general trend for retailers such as supermarkets, who have struggled to translate the pandemic sales surge into a profits surge.

Although there has been upwards price movement, I still don’t think the current share price fully factors in the strength of B&M’s performance this year. Additionally, with the economy in recession, the medium-term investment case for discount retailers such as B&M has strengthened, in my opinion.

I expect a pop in the share price in September or October, as the shares benefit from the dual impact of increased demand due to the FTSE inclusion and the market’s full appreciation of the B&M growth story when the first-half results are revealed.

Conclusion: B&M Has Further Upside

With a current P/E around 23 and a recent run-up in its price, I don’t think B&M is cheap. However, the stream of good news continues for now, and I expect that to have a positive impact on the shares. While I understand taking profits now, I think there is further upside for the retailer in the short term based on the positive news stream and index buying. I expect to see it test 550p in the coming six months versus 460p today.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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