Today I am looking at the investment prospects of two Wednesday fallers.
Amazon muddies the waters
Online grocery giant Ocado (LSE: OCDO) has endured a rough time in recent days, following news that the supermarket wars look set to get a lot, lot tougher. Shares in the business are over 5% lower at the time of writing, following on from a hefty decline in the previous session.
Ocado was struck by news that global internet giant Amazon (NASDAQ: AMZN) is planning to ramp up its UK food delivery service. The firm’s UK chief, Christopher North, told The Guardian that Amazon plans to add significantly to the 4,000 labelled goods currently sold by Amazon Pantry, a division launched just last month.
“We are really happy with the early numbers,” North advised, leading to the planned ramp-up of its service in the new year. If successful, the move could potentially lead to fresh goods also being offered, as is already the case in some parts of the US.
Having scrambled back into the black last year, the City expects the upward earnings momentum at Ocado to continue during the medium term at least. A 58% rise is currently anticipated for 2015, with a further 46% advance pencilled in for next year.
Still, many investors will be put off by the colossal P/E ratings that such projections create. For the outgoing period Ocado deals on a multiple of 199.2 times, and although this slips to 138.2 times for 2016, this reading is in a different galaxy to the benchmark of 15 times, or lower, that is widely-considered attractive value.
Given that the firm’s long-term outlook is already being pressured by the breakneck success of discounters Aldi and Lidl, as well as by premium outlets like Waitrose, I reckon Amazon’s own expansion makes Ocado an even more unattractive pick at present prices.
Oil play set to plummet?
Like Ocado, I also see little reason to plough into BP (LSE: BP) at the present time. Shares in the business have fallen 1.3% in midweek business, as crude prices have resumed their downward trajectory, and I believe much further weakness can be expected.
The Brent benchmark was recently dealing around $36.90 per barrel, skating back towards recent troughs of $36.05 that marked the cheapest level since 2004. Investors have been spooked by news that a cold winter in Europe and the US is now forecast to be shorter than originally thought.
Looking further down the line, I believe prices should keep on falling, as growing output from OPEC, North America and Russia adds to already-bloated inventories. And demand is not expected to pick up any time soon, either — the IMF’s Christine Lagarde warned just today that “global [economic] growth will be disappointing and uneven” next year.
City consensus predicts earnings expansion of 61% and 6% at BP in 2015 and 2016 respectively, figures I find hard to believe as revenues continue to slide.
But even if accurate, such numbers still leave the business on a P/E rating of 14.6 times for next year, a figure I would consider far too high given BP’s patchy long-term earnings outlook. I reckon further share price weakness could be in store as the fall in crude prices shows no signs of slowing.
