Today I am looking at the investment prospects of three recent FTSE failures.
Tesco
Embattled grocer Tesco’s (LSE: TSCO) steady share price descent has continued during the course of the week, the business having shed an extra 6% in the past seven days. The stock is now dealing at levels not seen since late last year, reflecting the steady deterioration in perky investor sentiment that had earlier pushed prices skywards at the start of the year.
The honeymoon period for chief executive Dave Lewis is now well and truly over. Despite the new man being in the job for more than a year now, Tesco’s sales have failed to meaningfully recover as both discount and premium outlets keep taking bites out of the firm’s market share. Indeed, latest Kantar Worldpanel numbers showed the Cheshunt firm’s share fall by a further 50 basis points in the 12 weeks to 16 August, to 28.3%.
Tesco appears to be locked in a state of paralysis, not knowing how to address the rapid fragmentation of the UK supermarket sector: it cannot compete with Lidl and Aldi on price, and it significantly lags the likes of Waitrose in the quality stakes. The City subsequently expects Tesco to endure a fourth earnings slip in the 12 months to February 2016, this time by 7%. With the firm dealing on a super-high P/E rating of 20.6 times, I believe the share price has plenty further room to fall.
Mondi
Like Tesco, paper and packaging giant Mondi (LSE: MNDI) has endured a torrid time during the past week and shares have conceded 7% of their value. The business has suffered markedly after Goldman Sachs placed a ‘sell’ recommendation, asserting that Mondi’s exposure to kraftliner in its packaging paper division, coupled with severe headwinds in Russia, are set to bite into earnings growth.
But unlike its FTSE peer, I believe this weakness provides a fresh buying opportunity. Firstly, the firm’s terrific exposure to emerging regions — the business sources around half of total sales from these territories — should support solid revenues gains in the years ahead as consumer spending takes off. Indeed, Mondi advised just last month that pre-tax profit surged 28% during January-June, to €390m, thanks to strength across all units.
And Mondi’s appetite for acquisitions provides further room for growth, too — just today the company hoovered up non-woven fabrics specialists Ascania for €54m, boosting its position in the hygiene products market. The number crunchers expect Mondi to record earnings expansion of 20% in 2015 and 9% in 2016, leaving the business dealing on very attractive P/E multiples of 15.6 times and 14.2 times respectively.
Inmarsat
The FTSE 100’s relative new boy Inmarsat (LSE: ISAT) has also taken a pasting in the course of the past week, the satellite builders having fallen 5% since last Friday. The business — which joined Britain’s elite index back in June — has seen its share price rise in oft-volatile conditions following a raft of news releases in August, prompting many to indulge in a spot of profit booking more recently.
However, I believe that the share price could still have plenty more room to charge higher as Inmarsat ramps up its exciting new telecoms network. The tech play successfully launched its third satellit last month, the catchily-monikered I-5 F3, as it continues to build its Global Xpress mobile broadband service. The space boffins are now expecting to begin offering commercial GX services by the close of 2015, a critical step as it seeks to head off rising competition in the mobile satellite services arena.
And the City certainly seems convinced that the programme should deliver terrific earnings growth in the years ahead — although rival activity and heavy capex are expected to push the bottom line 12% lower in 2015, a 23% bounce is predicted in 2016 as revenues pick up. Consequently a P/E ratio of 35.9 times for this year falls to a much-improved 27.8 times for 2016. Further volatility is possible at these levels, but I believe Inmarsat remains a strong long-term pick.
