Today I am looking at three FTSE stock picks facing severe peril.
Tesco
Despite years of being put on the backfoot by budget entrants Aldi and Lidl, Britain’s number one supermarket Tesco (LSE: TSCO) has still failed to find the remedy needed to stop its customer base from haemorrhaging.
The appointment of former Unilever executive Dave Lewis was heralded as the move to transform the firm’s long-term fortunes. But aside from introducing yet more earnings-crushing discounting, the new administration has proved alarmingly bereft of ideas to attract customers back through the doors. That’s not to denigrate all of the work of the ‘new-look’ Tesco, however, with measures like store closures and cost-cutting across the business giving earnings a nudge in the right direction.
But until Tesco gets to grips with tackling the cheaper chains, and as the critical convenience and online areas become ever-more congested, I believe the Cheshunt business is likely to suffer severe earnings weakness for some time to come. Indeed, the City expects Tesco to endure a 36% earnings slide in the 12 months to February 2016 alone, leaving the business dealing on a hugely expensive P/E rating of 34.7 times. I see little reason for investors to plough in at the present time.
Centrica
Like Tesco, electricity and gas giant Centrica (LSE: CNA) is also suffering the wrath of rising competition. Britons are becoming increasingly-accustomed to the concept of ‘shopping around’ to slash household bills, whether it be for car insurance or power providers. And egged on by politicians and consumer groups, this increasing trend is playing into the hands of freshly-emerged independent suppliers.
In a bid to halt the erosion in its customer base, Centrica — which saw its subscriber base slip by a further 55,000 accounts in June from the end of 2014 — is having to keep on slashing prices, putting extra weight on its earnings performance. And with regulator Ofgem keeping the charging practices of the ‘Big Six’ suppliers under severe scrutiny, Centrica may be forced to cap future rises, further denting its revenues outlook.
It therefore comes as little surprise that the number crunchers expect Centrica to endure a 7% bottom-line slip in 2015, resulting in a P/E rating of 12.7. Even though this reading falls within the benchmark of 15 or below that usually indicates decent value, I reckon an increasingly-difficult trading environment could prompt significant earnings downgrades at the firm.
Royal Dutch Shell
Centrica is also facing significant upheaval at its upstream operations, thanks to the chronic supply/demand imbalance washing over the oil sector. And these worsening market fundamentals were laid bare by industry heavyweight Shell (LSE: RDSB) late last month — the firm recorded a colossal $6.1bn loss during July-September, due to the weak oil price and the vast cost of project cancellations.
Following the abandonment of its Alaskan drilling programme in September, Shell advised in October that it was binning development of its Carmon Creek thermal oil sands project because current crude prices make the asset economically unviable. Indeed, cash is becoming increasingly important across the oil industry, and Shell announced this week plans to double cost savings to $2bn.
Although introduced to keep its acquisition of BG Group on track, a strategy of aggressive cost-cutting is nothing new at the firm as it grapples with the prospect of a falling oil price. And should crude values continue to disappoint — a very real scenario in my opinion — these measures are likely to be severely overshadowed by a tanking top line. Indeed, Shell is expected to endure a further 34% earnings drop in 2015 alone, resulting in an unattractive P/E ratio of 13.5 times.
