Shares in Europe’s largest bank, Santander (LSE: BNC) have underperformed this year and are at present, 33% below where they started back in January. Santander’s weakness can be traced back to broader concerns about the state of the Spanish banking industry. Many analysts believe that Spain’s banks, which have been putting on a brave face since the European debt crisis, could be trying to conceal the true extent of the non-performing loans on their balance sheets. Low-interest rates and the availability of credit is making it easy for heavily indebted borrowers to roll over debts and convince lenders that they can remain in business. However, sooner or later these heavily indebted companies will have to face reality, and Spain’s banking sector might not be strong enough to withstand the wave of defaults that could be just around the corner.
What’s more, Santander is highly exposed to Brazil, in fact, it’s the bank’s second largest market, and Brazil’s economy has fallen into a deep recession this year. The country’s GDP contracted by 1.7% during the third quarter deepening the country’s worst recession in 25 years. Year-on-year Brazil’s GDP has contracted by 4.5%. All in all, Santander is facing some very strong headwinds and the market is right to be concerned about the bank’s outlook. City analysts now expect Santander’s earnings to growth by 3% this year, down from the double-digit growth expected earlier in the year. The bank’s shares trade at a P/E of 10.6, which seems about right considering the uncertainty ahead.
Vedanta’s (LSE: VED) shares have crashed to a new ten-year low this month over concerns about the company’s dividend, debt pile, and falling profits. The Indian miner has already pulled its interim dividend payment, and it’s now highly likely that the company will cut its final payout as well. Group pre-tax profits fell 62% to $244m in the six months to September 30, and Vedanta needs most of this cash to pay down its debt. Reported net debt is just over $8bn, 9.4 times estimated 2016 earnings before interest tax, depreciation, and amortization (EBITDA). A debt to EBITDA ratio of more than two times is usually considered excessive. Nonetheless, to try and strengthen its balance sheet, Vedanta is trying to buy out the 40% of Cairn India, its oil subsidiary that Vedanta Ltd. doesn’t already own. The merger will give Vedanta access to Cairn’s cash hoard, which can then be used to pay off debt. But it’s proving difficult to convince Cairn’s shareholders to sell. If the miner can complete the deal, then its stronger balance sheet will make it solid recovery play, but until Cairn’s merger with Vedanta concludes, investors might want to stay away.
And lastly, ASOS (LSE: ASC). While City analysts are expecting Asos to report earnings per share growth of 22% this year, the company’s shares do look expensive. Despite the fact that the company is a leader in its field of online retailing, Asos’s forward P/E of 59.4 doesn’t make it a bargain. Even after factoring in the company’s projected growth the shares still look expensive to me as they trade at a PEG ratio of 2.7. A PEG ratio of less than one signals that the stock in question offers growth at a reasonable price.
