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FTSE 100 entrants should not get too comfy at the top

The post-pandemic ascendancy of Royal Mail (RMG) and ITV (ITV) has been far less extreme. Yet investors should still question the merit behind the share price rallies that this month sent the groups back into the FTSE 100. The latter has been propelled by a brighter outlook for consumer spending and ergo, advertising spending. Adjusted cash profits were a fifth lower in 2020, but came in ahead of expectations thanks to a rebound in fourth quarter advertising spend and cost cutting.

Investors have been encouraged further by the news that advertising revenue was 68 percent higher in April and forecast to increase by 85 per cent in May and up to 90 per cent in June, compared with the prior year. The start of smash dating series Love Island and the Euros tournament will provide a further boost.

Yet those predicted performances are set against extremely weak comparables, as companies slashed marketing budgets in the immediate onset of last year’s lockdown restrictions. Some fundamental challenges remain. Chief executive Carolyn McCall is attempting to drive growth from ITV's content creation studios business and advertiser-funded on-demand and subscription services such as the ITV Hub and BritBox. While ITV Studios licenses content to heavyweights such as Netflix and Amazon, ITV also competes with the media giants via its latter enterprises.  

A bigger problem is the group’s considerable exposure to the fickle and structurally declining TV spot advertising industry. Even before the pandemic, TV spot advertising’s percentage of display advertising fell from 32 per cent to 29 per cent during 2019 – continuing a decline from 41 per cent in 2013, according to marketing insight group WARC. 

Analysts at Berenberg have argued that success in one comes at the expense of the other. “The stronger the company makes ITV Hub, the less likely it is that people will feel the need to subscribe to Britbox," they reckon. While sales forecasts for 2021 and 2022 have been upgraded, the brokerage has left its 2023 figure unchanged and still a touch below the 2019 level.

Investors in Royal Mail, which scored an easier route into the index after RSA Insurance was taken private, could also benefit from a dose of cynicism. Yes, the pandemic has propelled parcel volumes and offset the long-standing decline in letters. Yet long gone are the days of the group’s monopoly. It might still have the largest share of the parcel delivery market at 35 per cent, according to ParcelHero. But more agile behemoth Amazon (US: AMZN) has secured the number two spot, building a 15 per cent slice since launching its logistics business in the UK 11 years ago. Rivals such as Hermes and Deutsche Post’s (DE:DPW) DHL offer additional competition.   

Both of the index’s latest arrivals may not want to get too comfy back at the top.