Today I am looking at three London laggards expected to endure prolonged earnings pain.
Tesco
Despite an endless stream of schemes to attract customers back through its doors, from round after round of discounting through to fresh branding and store re-fits, Tesco (LSE: TSCO) has proved itself surprisingly impotent in its fightback against the likes of Aldi and Lidl. Indeed, latest Kantar Worldpanel data showed sales drop another 1.7% in the 12 weeks to October 11, pushing Tesco’s market share to 28.1% from 28.8% a year earlier.
The latest initiative announced by the chain is to integrate Arcadia fashion outlets like Dorothy Perkins and Burton into its superstores. But the strategy of bringing High Street brands in store is nothing new, and has done very little to stem its flagging fortunes at the checkout. Despite spending years at the drawing board, Tesco has produced nothing but token ideas to rejuvenate its sales performance.
Indeed, rising market fragmentation is expected to produce a fourth successive earnings dip in the year to February 2016, this time by a chunky 35%. And this figure leaves the supermarket dealing on a quite bizarre P/E ratio of 34.9 times, some way above the bargain watermark of 10 times which I would consider a fair reflection of Tesco’s insipid growth prospects. Until the business shows signs of a tangible turnaround I believe investors should steer well clear.
Rio Tinto
Due to the poor price outlook across commodity classes, I believe diversified digger Rio Tinto (LSE: RIO) should remain under significant earnings pressure for this year and beyond. Just this week aluminium become the latest victim of the severe supply/demand imbalances washing across resources markets, and LME three-month futures fell to six-and-a-half-year lows around $1,475 per tonne.
Aluminium is Rio Tinto’s second most important market behind iron ore, and the business sources around a quarter of total earnings from the metal. The likelihood of rising LME inventories is expected to push prices still lower — indeed, Bank of America has touted a possible price of $1,200 per tonne in the near future — and the problem of worsening oversupply is expected to whack prices of the miner’s other key commodities, too.
And as materials glutton China undergoes a painful economic rebalancing, a backcloth of subdued demand is anticipated to push earnings at Rio Tinto 7% lower in 2016, following on from a predicted 48% duck this year. A consequent P/E ratio of 15.6 times for next year is far from terrible on paper, but given the firm’s sickly revenues outlook I believe the stock remains overvalued.
John Wood Group
Along with Rio Tinto, I believe that Wood Group (LSE: WG) is set to suffer lasting revenues pain as oversupply in commodity markets weighs. Indeed, the business — which builds hardware for the fossil fuel industries — would no doubt have been wringing its hands this week after seeing the Brent benchmark slump to two-month lows around $47 per barrel.
The oil price continues to trade edgily around the $50 marker, failing to gain traction as markets anticipate further bad economic data from China. With global inventories on the verge of bursting open, and production from OPEC, Russia and the US still heading higher, oil producers the world over continue to slash capital expenditure — BP announced just this week plans to cut spending to $17bn-$19bn through to 2017. It had originally planned to shell out $24bn-$26bn this year alone.
Signs of intensifying cash saving measures bode ill for the revenues outlook of Wood Group, naturally, and the City is becoming increasingly active in slashing it earnings forecasts for the firm. A 26% earnings slip is currently forecast for 2015, and an extra 11% drop is expected next year, resulting in a P/E ratio of 13.7 times. Again, I for one won’t be piling into the pipes play at these prices given Wood Group’s poor sales outlook.
