Today I am looking at the investment prospects of two FTSE 100 stalwarts.
Supermarket struggles
Grocery giant Sainsbury’s (LSE: SBRY) has breathed a huge sigh of relief in recent months as diving sales over the past few years seem to have stabilised. I have long cast doubt on the longevity of any such recovery, however, as middle-tier rival Tesco can attest to — it also enjoyed a brief revenues renaissance around the turn of 2015.
The likes of Sainsbury’s have been reduced to little more than introducing round after round of earnings-crushing price cuts to take on the discounters. So news that Asda is due to slash the cost of hundreds of more products last week comes as a further headache, while news that Aldi plans to open a further 80 stores this year alone poses a more long-term problem.
And Sainsbury’s broader recovery strategy has received a further whack after its £1.3bn bid for Argos operator Home Retail Group was derailed by a £1.42bn bid from South Africa’s Steinhoff International on Friday. Sainsbury’s now has until March 18th to make a new takeover attempt.
Still, I believe Steinhoff International’s move actually does Sainsbury’s a favour — after all, the London firm has enough on its hands to turn around its own struggling supermarkets, let alone taking on the might of Amazon et al in the general merchandise stakes with Argos.
Regardless of how the takeover pans out, I reckon Sainsbury’s still carries too much risk for savvy investors. A 16% earnings dip is pencilled in for 2016 alone, and although a subsequent P/E ratio of 11.3 times is an attractive ‘paper’ valuation, I believe the chain needs to show much more effectiveness in taking on Lidl and Aldi before I for one would consider investing.
A perilous power pick
Energy giant SSE (LSE: SSE) has been fighting a losing battle over the past couple of years to stop its customer base rotting. The steady rise of independent suppliers has taken a chunk out of the revenues performance across the whole ‘Big Six,’ with householders being egged to switch by consumer groups calling for severe price reductions in line with falling wholesale costs.
And the scale of Britain’s switching culture was laid bare by Ofgem data released this week. The number of consumers changing supplier advanced by 15% year-on-year in 2015, to 6.1 million, the regulator said.
Britain’s major operators have attempted to curry favour over the past year with a string of tariff cuts — SSE itself cut gas prices again in January, by 5.3% — but these moves are having little impact. The London firm saw total accounts fall to 8.28 million in December from 8.58 million just nine months earlier.
Not surprisingly the City expects SSE to suffer a 3% earnings slip in the year to March 2016, putting paid to firm’s long record of annual rises. A low P/E rating of 12.5 times — not to mention a dividend yield of 6.3% — may still attract investors, but I expect both earnings and shareholder payouts to come under increasing pressure in the years ahead.
