Today I am detailing three FTSE stocks fraught with a multitude of earnings problems.
Tesco
Quite why investors continue to pile into Tesco (LSE TSCO) is quite beyond me, I’m afraid. Shares in the battered supermarket giant are once again within a whisker of hitting lows not visited since 2003, but despite this chronic weakness I reckon the stock remains supremely overvalued.
Tesco is expected to record a fourth successive earnings slip in the 12 months to February 2016, this time by a chunky 38%, leaving the retailer changing hands on a quite unbelievable P/E multiple of 35.1 times. I would consider a reading much, much closer to the bargain benchmark of 10 times — territory fit for firms with high risk profiles and poor growth outlooks — to be a more accurate reflection of Tesco’s travails.
I would not rule out a huge share price re-rating to bring Tesco closer to these levels, what with Morrisons and Sainsbury’s chalking up further underlying sales slips of 2.6% and 1.1% respectively in their latest quarters. Once again a combination of crippling grocery price deflation and the sturdy progress of discounters Lidl and Aldi continues to whack the established supermarkets, and I expect things to get much worse as competition across the industry intensifies.
Vedanta Resources
Like Tesco, I believe energy and metals giant Vedanta Resources (LSE: VED) should continue to endure prolonged top-line pain as demand across commodity markets wanes. Copper prices — a segment from which the business sources almost four-tenths of total revenues — sunk to fresh six-year lows around $4,800 per tonne on Friday, and further dips are widely predicted as new supply outpaces off-take.
But it is not only in the copper market where Vedanta faces a headache, with key segments like zinc, aluminium and oil also toiling around multi-year nadirs. The business reported last week that revenues slipped 12% during April-September, to $5.7bn, pushing EBITDA 39% lower to $1.3bn. Despite extensive cost-cutting, these measures are clearly no match in an environment of tanking commodity prices.
The City expects Vedanta to extend losses of 14.2 US cents per share in the 12 months to March 2015, and losses of 15 cents are pencilled in for the current period alone. As Chinese economic cooling continues to accelerate, and the likes of Vedanta remain committed to upping production in chronically-oversupplied markets, I reckon earnings will languish for some time to come.
Fenner
An environment of weak commodity prices is certainly playing havoc with industrial conveyor-belt builder Fenner (LSE: FENR), too. The company announced this week that revenues dipped almost 9% during the year to August 2015, falling to £666.7m, which pushed it into a pre-tax loss of £5.3m, compared with a profit of £29.2m in the previous period.
If this wasn’t bad enough, Fenner (which builds hardware for the coal industry) advised that “in light of the recent further deterioration in the US coal industry … the Group is likely to achieve an outcome for the current financial year which is moderately below its previous expectations.“
The City has pencilled in a 26% earnings decline for the 12 months to August 2016, and slowing Chinese economic growth, combined with ‘decarbonisation’ initiatives across the globe, is likely to lead to profits pain further down the line, too. I believe that Fenner’s P/E rating of 13 times remains far too high given the murky outlook for key markets.
