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Why Would Anyone Buy Tesco PLC, Anglo American plc, BP plc And SSE PLC At These Prices?

Today I am looking at four FTSE basket cases I believe should be dealing at much cheaper prices.

Tesco

As the march of the discounters and premium outlets leave mid-tier operators like Tesco (LSE: TSCO) scrambling around in an ever-smaller customer pool, I believe the days of stratospheric earnings growth are firmly behind the established chains. Indeed, the Cheshunt firm announced just today that despite the introduction of price reduction after price reduction, it could still not prevent sales slumping 1.3% during March-May.

Although the scale of the decline is a sure improvement from around a year ago, the City expects Tesco to ring up a fourth successive earnings decline for the year concluding February 2016, and a 5% dip is currently predicted. So I don’t understand why the retailer trades on a relatively-huge P/E multiple of 23.9 times given its continued failure to get sales trekking higher. And with capex cutbacks indicating the huge stress on the balance sheet, I believe that even a meagre predicted dividend of 0.9p per share — yielding just 0.9% — may be fanciful.

Anglo American

With supply imbalances worsening across all of its core markets, I believe that investors are putting too much faith in a miraculous comeback in Anglo American’s (LSE: AAL) bottom line. The mining colossus has posted three consecutive dips on the back of collapsing commodity prices — particularly in the coal and iron ore segments, areas from responsible for around half of total earnings — and another annual drop is widely expected in 2015, this time to the tune of 37%.

However, Anglo American deals on a P/E rating of 14.7 times prospective earnings. This is by no means eye-watering, but still too expensive in my opinion given that production hikes across the globe threaten to keep earnings rattling lower. And with net debt also climbing — this advanced to $12.9bn last year — I reckon dividends are in danger of finally heading south having been held at 85 US cents per share since 2012, giving investors little reason to believe a yield of 5.6% through to end-2016.

BP

Like Anglo American, I believe that BP (LSE: BP) is a high-risk gamble as a backcloth of worsening oversupply in the oil market threatens earnings growth. With OPEC remaining committed to pumping, and US shale output heading higher despite rig reductions, quite why the City expects BP to punch earnings growth of 98% and 25% in 2015 and 2016 escapes me, I’m afraid. Particularly as production costs continue to rise and the legal fallout of the Deepwater Horizon crisis is yet to be resolved.

Consequently I reckon P/E multiples of 16.7 times for this year, and 13 times for 2016, can be taken with a large pinch of salt. And while the number crunchers anticipate a dividend of around 40.7 US cents per share for this year and next — leaving BP with a massive yield of 6% — I for one am not so optimistic given the prospect of further earnings travails, particularly as the fossil fuel giant also has a $25.1bn net debt pile to contend with.

SSE

Power play SSE (LSE: SSE) faces an uncertain future as politicians and regulators alike put the profitability of the utilities sector under scrutiny. The improving economy may be stashing more money in people’s pockets, but the issue of unfair household bills remains an unwanted hot potato that has exploded in recent months amid accusations that energy providers have failed to adequately pass on falling wholesale costs to their customers.

With customers switching suppliers in their droves, SSE is expected to record an 11% earnings dip for the year ending March 2016, resulting in a P/E ratio of 14 times. But I believe the firm should be dealing closer to the bargain barometer of 10 times given the threat of heavy legislative changes that could smash earnings. And with rumours of possible profit-curbs doing the rounds, I would add that investors should give projected dividends of 90.5p per share this year and 93p in 2017 short shrift, even if these figures do produce towering yields of 5.6% and 5.8%.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.