Is Now The Time To Buy Bombed-Out Tesco PLC, BP plc And GKN plc?

Royston Wild runs the rule over London laggards Tesco PLC (LON: TSCO), BP plc (LON: BP) and GKN plc (LON: GKN).

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Today I am looking at the investment prospects of three high-profile FTSE flailers.

Tesco

Grocery giant Tesco’s (LSE: TSCO) spritely start to the year has fizzled out as doubts have resurfaced over the firm’s ability to beat off the discounters. The business is now dealing just above 200p per share after an 11% share price decline during the past three months, and a break through this level would see the stock hit levels not seen since early January.

And given the steady stream of bad news surrounding the firm I reckon a dip back to these levels is an inevitability. Latest Kantar Worldpanel data showed till rolls at Tesco recede 0.6% during the 12 weeks to July 19th, as the ‘price wars’ between Britain’s major operators continued to erode Tesco’s traditional customer base.

Tesco hopes the introduction of fresh price-cutting measures like its ‘Clubcard Boost‘ loyalty bonus, as well as a reduction in the number of products it carries, will help it to stem the charge of Aldi and Lidl.

But with prolonged discounting having failed to resurrect its flagging fortunes, and its online and convenience growth arms becoming more and more competitive, it is hard to see the Cheshunt firm delivering meaningful growth anytime soon. And with an anticipated 10% earnings duck pencilled in for January 2015, I reckon an elevated P/E ratio of 24.7 times leaves Tesco susceptible to further share-price pain.

BP

Like Tesco, I believe the likelihood of BP (LSE: BP) staging any sort of share-price turnaround any time soon is remote at best. The fossil fuel colossus has sunk 17% since the middle of May, and 28% since the crude price’s dive from $115 per barrel last summer. And with black gold prices back on the defensive — the Brent benchmark has dropped back below $50 in August — I am convinced BP is also set to sink once more.

The oil market received further bad news this week when OPEC data showed group output climb by 100,700 barrels per day, to 31.5 million, marking the highest level for three years. The uptick was prompted by resurgent Iranian production following the lifting of Western sanctions. But with US shale activity ticking steadily higher, and pumpers in Russia also stepping up a gear, inventories across the globe look set to remain at bursting point for some time yet.

In light of these stresses the oil industry is scaling back aggressively, and the capex reductions announced by Glencore last week follow recent massive job cuts announced by Shell and Centrica at the close of July. Given this backcloth I believe a predicted 84% earnings surge at BP in 2015 is optimistic at best, in turn leaving a decent P/E ratio of 15.6 times extremely fanciful. I expect brokers across the City to break out the red pen once again as industry data worsens, leaving BP in severe danger of fresh stock price weakness.

GKN

Diversified engineer GKN (LSE: GKN) has also endured a poor performance on the London exchanges in recent times, and the business has shed 16% of its stock price value during the past three months alone. Indeed, falling sales at its Land Systems division, not to mention declining military demand and the impact of reduced Airbus A330 orders on its Aerospace arm, have whacked investor appetite for the business since the start of the year.

Still, I believe these problems are short-term worries and that GKN’s top-tier status with the world’s biggest aircraft and car manufacturers should underpin brilliant earnings expansion on a longer time horizon. And the Redditch company’s acquisition of Fokker Technologies for £499m last month has been described as something of a coup, boosting the company’s expertise in the sweet spot of aerostructures and electrical wiring systems, as well as expanding GKN’s vast global presence.

The City expects the engineer to see earnings duck 11% in 2015 before staging a 9% recovery next year, pushing a P/E ratio of 11.9 times to just 10.9 times for 2016 — any reading around or below 10 times is widely considered too good to pass on. Given the hot long-term growth prospects for the automotive and airspace industries, I reckon GKN is in rude shape to enjoy brilliant revenues expansion in the years ahead, making the business a steal at current price levels.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild owns shares of GKN. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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