Today I am looking at three stock market terrors poised to endure extended earnings woe.
Royal Dutch Shell
Fossil fuel colossus Shell (LSE: RDSB) (NYSE: RDS-B.US) has grabbed the headlines again over the past week after the US government gave the green light for drilling work off the coast of Alaska to begin during the summer. Although the region has long been considered the oil sector’s holy grail due to the billions of untapped barrels of oil sitting under the surface, Shell has already experienced production troubles in the Arctic and was forced to pack up work in 2012 following huge safety failures.
The business is already facing a challenging backcloth as a worsening supply/demand balance across the crude market threatens to send prices plummeting again. Accordingly Shell has divested heavily to build a capital buffer — just today it sold its Butagaz LPG division to DCC for $529m — and has also taken the hatchet to its capex budgets in recent years. But of course such drastic action raises questions over how exactly Shell will generate earnings expansion in the years ahead.
Although Shell’s’ planned purchase of BG Group gives it access to the latter’s blue-ribbon assets in Brazil and Australia, in the current climate I reckon that earnings growth could still prove elusive. Indeed, these troubles are expected to push earnings 32% lower in 2015, according to City analysts, creating an unreasonably-high P/E multiple of 15.4 times. And although the bottom line is anticipated to swell 29% the following year, I do not foresee such explosive growth given the number of hurdles the oil producer has to jump.
Tesco
With the fragmentation of the British grocery space showing no signs of slowing, I expect Tesco (LSE: TSCO) to continue to flail. Chief executive Dave Lewis can no longer be considered to be enjoying his ‘honeymoon period’ given that the former Unilever man has been at the helm for more than eight months. So I believe that investors should be increasingly-alarmed that the Cheshunt firm is still to announce a blockbuster strategy to get customers flocking through its doors again.
It is true that the company’s discounting strategy helped stop the sales rot at Tesco since the latter part of 2014. But latest industry suggests that this expensive strategy is now running out of fuel — Kantar Worldpanel’s May release showed sales dip again, by 1% — raising questions over what the business has up its sleeve to boost revenues. With the grocer’s high-end and budget rivals expanding rapidly, and the growth segments of online and convenience becoming increasingly-congested, Tesco needs to start pulling rabbits out of hats sooner rather than later.
Accordingly the City expects the supermarket to punch a fourth successive annual dip for the year concluding February 2016, albeit by a modest 1%. And quite astonishingly current projections leave Tesco changing hands on a monster P/E ratio of 24.4 times.
Like Shell, I believe that a multiple closer to the bargain touchstone of 10 times or below would be a fairer rating given the massive roadblocks to bottom-line growth. And given that Tesco is still to draw up a robust turnaround plan, I reckon expectations of a 29% earnings bounce in 2017 to be bullish in the extreme.
Centrica
Electricity and gas giant Centrica (LSE: CNA) faces the double-whammy of intensifying competition across its retail operations, mirroring the woes seen at Tesco, and the effects of a significantly-weakened crude price, matching the problems seen over at Shell.
The share price has enjoyed a boost following this month’s general election, with the demise of Labour’s political challenge — and with it their plans to roll out revenues-crippling price freezes — lessening fears of heavy regulatory action. Still, Centrica and the rest of the ‘Big Six’ energy providers are still undergoing an investigation over their profit levels by the Competition and Markets Authority, a study which could prompt a seismic shake-up of the industry.
On top of this, the country’s major power providers may still be forced to keep cutting tariffs to hobble the charge of the new entrants to the energy sector. Meanwhile the huge costs of Centrica’s North Sea operations, combined with the impact of a flagging oil price is also hammering the firm’s upstream division.
Consequently Centrica is expected to record a 6% earnings decline in 2015, producing a P/E ratio of 15.6 times, although a 2% bottom-line improvement is chalked in for 2016. Still, I reckon that the utilities play still has a multitude of issues to overcome before it can get return to growth.
