Today I am looking at the share price prospects of three London laggards.
Tesco
Investor appetite for supermarket giant Tesco (LSE: TSCO) sunk yet again last week, sending shares in the business 6% lower between Monday and Friday. At one point the stock struck its cheapest since the spring of 2003, and I believe the Cheshunt firm has much further to fall as competitive pressures mount.
Last week Tesco chose to pay $12m to settle a claim with US shareholders pertaining to its £263m profit overstatement for the first half of 2014, although it stated “no admission of liability.” The company still has to deal with a second case currently filed, but I am far more concerned by Tesco’s inability to stymie the charge of Aldi and Lidl — researcher Kantar Worldpanel said that sales slumped an extra 2.5% during the 12 weeks to November 8th.
Even though Tesco has shed half of its value in the past three years alone, I reckon the company still appears grossly overvalued. The chain is expected to follow a 45% earnings drop in the year to February 2016 with a 77% bounce in 2017, resulting in a slightly high P/E ratio of 18.1 times. And given that the grocery ‘price wars’ are still intensifying, and both discount and premium chains are aggressively expanding, I reckon next year’s predicted surge higher is massively optimistic.
Vedanta Resources
Likewise, I believe shrewd investors should continue to give energy and minerals play Vedanta Resources (LSE: VED) a wide berth as further stock price weakness can be expected. The London firm saw shares fall 4% last week as enduring fears over commodity prices hampered buying activity, and I fully expect worsening supply/demand imbalances to keep Vedanta under pressure.
News over the weekend that Chinese copper producers are discussing production cuts should of course come as welcome news. But the finalities of a deal are yet to be struck, and in the meantime a combination of insipid global consumption — combined with the impact of a soaring US dollar — threaten to push red metal prices still lower. Copper struck a fresh six-year nadir below $4,500 per tonne last week.
Meanwhile, Brent oil prices — Vedanta’s second-largest market behind copper — also threatens to collapse further below the $50 per barrel marker as inventories swell. The company is expected to swallow another annual loss in the 12 months to March 2016, this time by 8.5 cents per share, and I believe a bounce back into the black will remain elusive as global supply growth across major commodity classes outpaces demand.
Amec Foster Wheeler
And as commodity prices continue to sag, I reckon engineering services provider Amec Foster Wheeler (LSE: AMFW) is also a stock not for the faint of heart. Shares values slumped an additional 5% last week, and in total the business has conceded a shocking 40% since the start of November.
Amec Foster Wheeler spooked the market earlier this month by slashing the dividend by half, a move caused by oil and gas customers continuing to scale back expenditure and putting pricing pressure on the supply chain. The business advised that “we see no sign of these trends changing,” and a slight decline in the order book — to £6.5bn as of September from £6.6bn a year earlier — further underlines the sales pressure Amec Foster Wheeler faces looking ahead.
Earnings dips of 25% and 3% are pencilled in for 2015 and 2016 respectively at Amec Foster Wheeler, and even though a P/E ratio of 7.5 times for next year represents decent value on paper, I reckon shares could have much further to fall given the firm’s shaky earnings and dividend outlook.
