Today I’m looking at two FTSE 100 firms in danger of suffering prolonged earnings pain.
Bank battered
Financial giant Royal Bank of Scotland (LSE: RBS) saw its share price tank last week after the release of disappointing first-quarter results.
RBS reported pre-tax losses of £968m for January-March, ballooning from the £459m loss printed a year earlier. While a £1.2bn one-off dividend to the UK government clearly weighed heavily on the bank’s performance, this doesn’t tell the whole story.
RBS saw revenues slump by an alarming 13% during the quarter, to £3.06bn, reflecting the impact of difficult market conditions as well as heavy recent asset shedding. Indeed, the company’s decision to aggressively slim down its operations looks likely to significantly compromise its ability to generate meaty revenues in the years ahead.
But this isn’t the only problem facing the bank, with RBS warning that the cost of spinning off Williams & Glyn is likely to be “significantly greater” than initially estimated as it risks missing the December 2017 divestment deadline. And of course RBS continues to be hit by huge restructuring costs, as well as a steady uptick in PPI-related financial penalties.
The City expects RBS to swallow a 38% earnings drop in 2016, resulting in a P/E rating of 12.2 times. While this figure may be attractive on paper, I believe this simply reflects the huge level of risk facing the bank rather than decent value, and I feel investors should give the business a wide berth.
Takings still tanking
The intensifying top-line pressures denting Tesco (LSE: TSCO) and the other ‘Big Four’ supermarkets was once again laid bare on Wednesday.
Latest data from industry researcher Kantar Worldpanel showed sales across the established chains drop for the first time in a year during the 12 weeks to 24 April as low-price rivals maintained their electrifying charge. Aldi and Lidl saw sales jump 12.5% and 15.4%, respectively, during the period.
By comparison, Tesco saw total takings slump 1.3% from the corresponding 12 weeks in 2015, putting an end to the grocer’s steady improvement of recent months.
The company’s market share now stands at 28% versus 28.4% a year ago and it’s hard to see how Tesco can stop haemorrhaging shoppers to its rivals. The supermarket is stuck in limbo, unable to effectively beat competitors such as Waitrose on quality or the German challenger entrants on price.
Indeed, Kantar noted that “consumers are enjoying a golden period of cheaper groceries with like-for-like prices falling every month since September 2014.”
So Tesco, like its established rivals, continues to chase prices lower in a bid to rebuild its customer base. However, these actions are playing havoc with the company’s bottom line — Tesco is expected to see earnings decline for the fifth year on the trot in the period to February 2016.
And while the City expects earnings to rebound from this year, I’m not so upbeat as Tesco’s competitors up the ante in-store and in cyberspace. Consequently I believe the chain’s elevated P/E rating of 25.1 times is far too heady given its poor revenue outlook, providing ample reason for shrewd investors to sell-up.
