Footsie giants Lloyds (LSE: LLOY), Sainsbury’s (LSE: SBRY) and Royal Mail (LSE: RMG) have their fair share of challenges looking ahead.
But some would say these troubles are baked into each firms’ share price.
For 2017 Lloyds deals on a P/E ratio of 9.8 times; Sainsbury’s carries a reading of 13.2 times for the current year; and Royal Mail changes hands on a multiple of 10.2 times. By comparison the broader FTSE 100 forward average stands at a far-chunkier 15 times.
Don’t horse around
That is not to say investors should jump in, of course. After all, worsening trading conditions can see broker forecasts receive scything downgrades, putting ‘cheap’ P/E ratios to the sword in an instant.
Besides, the prospect of prolonged bottom-line woe can see low earnings multiples creep steadily higher.
Lloyds, for example, is expected to follow a 3% earnings slip in 2017 with a 4% drop in 2018, pushing its P/E ratio for next year above 10 times forward earnings. Readings below this level are associated with stocks threatened with severe and/or extended profits weakness, just like the Black Horse bank.
And many analysts indeed expect earnings at Lloyds to remain on the back foot next year and beyond. Not only does the bank face increasing revenues pressure as Brexit negotiations exacerbate economic cooling — in 2017 and beyond — but this backdrop also raises the prospect of bad loans stepping higher.
Till troubles
Supermarket colossus Sainsbury’s also faces an upward climb as new kids on the block Aldi and Lidl force the chain into ever-bloodier price war, the pressure exacerbated by their ambitious expansion schemes. And rising costs on the back of sterling’s slide is adding a double whammy to the poor profits outlook over at Sainsbury’s.
Like Lloyds, the number-crunchers expect earnings to retrace beyond this year, too — an anticipated 16% drop in the period to March 2017 will be followed with a 4% drop in fiscal 2018, according to latest forecasts.
And this latter reading pushes the P/E ratio to an even-worse 13.7 times for next year. I wouldn’t consider entertaining Sainsbury’s at the current time, particularly as medium-term earnings multiples soar above the ‘high risk watermark’ of 10 times.
Package powerhouse
On first look it could be said that Royal Mail could also be considered a poor growth pick, particularly as its P/E ratio falls outside this bargain benchmark of 10 times for the next few years.
Brexit is already causing havoc over at the country’s oldest courier, Royal Mail reporting a 2% revenues slip for its UK parcels and letters division during April-December due to increased business uncertainty. The City expects these troubles to create earnings dips of 3% and 1% in the years to March 2017 and 2018 respectively.
But unlike Lloyds and Sainsbury’s, I reckon Royal Mail’s long-term earnings outlook is much sunnier than its peers. The parcels giant can look to its continental GLS division to generate revenues growth should problems persist in its home market. And while the letters market is in terminal decline, I expect parcels traffic to keep surging as the internet shopping phenomenon continues, pushing earnings resoundingly higher in the years ahead.
I reckon Royal Mail is a terrific growth selection for patient investors, and especially at current prices.
