Today I’m looking at the negative newsflow smacking three London-listed giants.
Supermarket feels the strain
Shares in Sainsbury’s (LSE: SBRY) have remained choppy in 2016. The market has been weighing up the impact of the firm’s £1.3bn takeover of Argos operator Home Retail Group, a risky proposition given the catalogue specialist’s own struggles. However, a recent revenues revival has given investors faith that Sainsbury’s own struggling checkouts could be turning the corner.
Yet I’m not convinced and believe another sales downturn is inevitable as market fragmentation intensifies.
Indeed, the crushing charge of low-price rivals took another turn this week after Aldi announced plans to open 80 new stores this year alone, with planned outlets in affluent areas like Chipping Norton pulling its tanks directly onto the Sainsbury’s lawn. This follows news of even more price-slashing by the German firm late last week.
Against this backcloth it’s little surprise the City expects earnings to keep dragging at Sainsbury’s — dips of 16% and 2% are forecast for the years to March 2016 and 2017, respectively. Sure, a prospective P/E rating of 11.3 times for 2016 may be a low reading on paper, but I believe the grocer’s lack of growth drivers still make the business a poor stock selection.
Car sales set to slide?
Auto and aero parts engineer GKN (LSE: GKN) has endured a torrid time over the past year. Shares in the business have dived 30% as fears over cooling demand in the aeroplane sector, not to mention the fallout of the Volkswagen emissions scandal and signs of slowing sales on its car division, have all hampered market appetite.
And these concerns gained further traction this week following news that UBS expects auto sales in the critical Chinese market to cool. New registrations clocked in at 16% in January and the broker expects this to fall to 8% in February, thanks in part to the Chinese New Year. And some quarters are touting further dips once the effects of government incentives run out of steam.
But I’m convinced GKN remains a terrific long-term stock selection, its expertise in key engineering sectors poised to deliver stunning growth once bumpiness in the car and plane segments abates. And a predicted 3% earnings rise for 2016 leaves the business dealing on a very-appealing P/E rating of 11 times.
Oil cuts still off the table
Optimism over an eagerly-awaited cut to global oil production was given a shot in the arm this week after news of a meeting between Saudi Arabia, Russia, Venezuela and Qatar in Doha concerning future production levels.
But news has since emerged that the countries have merely agreed to keep production frozen at levels seen in January, Reuters reported. On top of this, any such deal is dependent on other major producing nations following suit, a tall order as market share remains king.
More drastic action has long been required to soothe bloated inventories and put crude prices back on an upward keel following January’s fresh multi-year troughs. And until such an agreement can be reached, I believe producers such as Enquest (LSE: ENQ) can expect much more bottom-line pain.
The City expects Enquest to finally slip into the red in 2016 with losses of 3.5 US cents per share, and with China’s economy flailing and global production continuing to head higher, I believe the risks far outweigh the potential long-term rewards.
