Today I am looking at a cluster of FTSE giants that have plummeted in recent weeks, and whether now represents a good time for investors to jump right on in.
Electrical goods retailer AO World (LSE: AO) has been one of the biggest casualties of the past month, the business having shed 18% since the same point in May and continuing the broad downtrend since February. And with good reason: despite total revenues climbing by almost a quarter, to £476.7m, in the year ending March 2015, it still managed to punch a pre-tax loss of £2.9m.
So despite enduring share price weakness, however, it could appear that AO World remains a very expensive bet as it gets to grips with intensifying competition and massive capex bills. The business is expected to record earnings of 0.8p per share in 2016, flipping from losses of 0.6p in the prior year but still creating a monster P/E multiple of 181.6 times.
And although AO World is expected to see earnings charge to 3.75p in fiscal 2017, the retailer still carries an elevated ratio of 38.7 times, well outside the benchmark of 15 times that signals decent value for money. Considering that the company is not anticipated to fork out a dividend any time soon, either, I reckon the stock boasts very little investment appeal at the current time.
Fossil fuel play Tullow Oil (LSE: TLW) has declined 12% during the past four weeks, fuelled in no small part by fears of a deteriorating oil market balance that has seen the resurgent crude price stall above $60 per barrel. Indeed, the market has shrugged off news that the business had settled a tax dispute with Uganda for $250m, a development that went some way to soothing fears over the future of Tullow Oil’s blockbuster Lake Albert project.
And with good reason, in my opinion, as the London business still appears to be grossly overvalued. I believe that the likelihood of weak oil prices is set to keep earnings under the cosh for some time, making current earnings projections wildly optimistic — the business is anticipated to flip from losses of 170.9 US cents per share in 2014 to earnings of 17.5 cents this year, before leaping to 27.5 cents in 2016.
But even if these projections could be decreed realistic, they still leave Tullow Oil trading on super-high P/E ratios of 33.5 times for 2015 and 21.3 times for next year. Considering the surging supply and stagnant demand that continues to threaten crude prices, and the operational unpredictability of oil exploration and production — not to mention the effect of rising costs — I believe the company remains a risk too far for shrewd investors.
Global services provider Serco (LSE SRP) has seen its stock price plummet 11% since the latter part of May, but I certainly wouldn’t advise investors to plant their cash in the troubled firm. The firm was one of the FTSE’s biggest movers in Tuesday business, but I reckon this will prove nothing more than a deadcat bounce and expect shares to track lower again.
Great uncertainty surrounds Serco following its decision to become a sole “business to government” provider operating in just five strategic areas, while it also faces a fight to remain cost-competitive. The business is expected to flip from losses of 134.96p per share in 2014 to earnings of 3p this year, although another nudge lower — to 2.9p — is pencilled in for 2016. Consequently Serco sports massive P/E ratings of 44 times and 45.3 times for 2015 and 2016 correspondingly.
And Serco is also expected to continue disappointing investors in the dividend stakes, too. The company declined to fork out a final dividend for 2014, resulting in a full-year payment of 3.1p per share versus 10.6p in 2013. And with the balance sheet expected to remain under pressure in the medium term — Serco is not expected to fork out any dividend at all in 2015 — I predict that income seekers will continue to be underwhelmed.
Amec Foster Wheeler
Unlike the three firms I have mentioned, however, I believe that Amec Foster Wheeler (LSE: AMFW) should be on the radar of all smart bargain hunters — shares have fallen 10% during the past month. The business’ industry-leading services across a multitude of engineering gives it splendid diversification, and I expect Amec Foster Wheeler to benefit from a steadily-improving global economy.
Amec Foster Wheeler is expected to swallow a second successive annual earnings drop in 2015 due to the current travails affecting the oil sector, and an 8% decline is currently forecast. But the London firn is predicted to rebound with a 7% rise in 2016, a figure that pushes an excellent P/E rating of just 11.2 times for this year to an even-better 10.3 times for 2016.
And the services play is a particular treat for dividend seekers. Although Amec Foster Wheeler is expected to keep the annual payment on hold in the current 12-month period, at around 43.3p per share, this yields an eye-popping 5.1%. And this rises to 5.2% amid predictions of a 43.7p reward.