Today I’m considering the bounceback potential of two battered FTSE 100 giants.
A trolley full of troubles
Hopes over a much-awaited turnaround at Sainsbury’s (LSE: SBRY) have picked up steam recently, a phenomenon that has seen the share explode 25% during the past three months.
These gains mean the supermarket is now dealing at 18-month highs. The market has been impressed by Sainsbury’s massive product investment across some 3,000 lines, work which helped nudge like-for-like sales 0.1% higher during the February quarter.
At face value this number may hardly be electrifying. But the this comes as the first revenues rise for two years, and at a time when sales at the country’s other Big Four supermarkets continue to decline.
The London firm continues to pull up trees in the popping online segment — sales at this division rose 14% in the most recent quarter — while Sainsbury’s is also steadily building its convenience store estate, the firm opening another 16 outlets in the period.
While these measures significantly boost the chain’s long-term earnings outlook, I don’t believe investors should be breaking out the bunting just yet.
The British grocery sector is becoming increasingly fragmented as both low-price and premium chains aggressively expand their ‘bricks and mortar’ and internet operations. And like Sainsbury’s, these firms are also ploughing vast sums into improving their product lines. Aldi and Lidl in particular are pulling their tanks directly onto their competitors’ lawns by expanding their ‘premium’ ranges.
The City expects Sainsbury’s to see an earnings dip through to the close of fiscal 2017 as a result of these pressures. So while many investors will be tempted by a P/E rating of 12.9 times, I for one am happy to sit on the sidelines for the time being.
Digger set to dive?
And I’m far more pessimistic over the earnings picture at Rio Tinto (LSE: RIO).
Sure, a strong recovery in commodity prices may have propelled the miner’s share price skywards in recent months — Rio Tinto has advanced 47% since the troubles of mid-January. But these recent rises defy the structural imbalances that threaten a significant reversal sooner rather than later.
And Rio Tinto — like many of its sector peers — is paying little heed to a cooling Chinese economy and already-heady stockpiles by ramping up output across many of its key markets.
Indeed, the London firm hiked iron ore production by 13% year-on-year during January-March, to 84m tonnes, it announced this week. The rise was thanks to recent expansions at Rio Tinto’s Pilbara projects in Australia, as well as the completion of several brownfield developments.
Although Rio Tinto continues to embark on massive cost-cutting and asset sales to ride out the current storm, these measures are likely to provide little material consolation as the top line continues to struggle.
The Square Mile expects Rio Tinto to record a third successive earnings decline in 2016, this time by a chunky 47%. And with the company changing hands on a heightened P/E ratio of 24.4 times, I believe Rio Tinto is a risky and expensive selection at the present time.
