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Why Earnings Should Drag At WM Morrison Supermarkets PLC & Rio Tinto plc Beyond 2015

Today I am looking at two FTSE 100 giants primed for prolonged earnings woe.

Past its ‘best before’ date?

Battered supermarket giant Morrisons was struck by fresh waves of worrying news during the course of this week. Retail researcher Kantar Worldpanel announced on Tuesday that the Bradford chain’s sales slipped 1.7% in the 12 weeks to November 8.

Trade experts Nielsen compounded the supermarket’s headaches on the same day by announcing that Morrisons’ sales had crept 1.8% lower in the three months to November 7, pushing its share of the grocery market to 10.7% from 11% a year ago.

It was a familiar story as the relentless march of the discounters bashed all of the established chains bar Sainsbury’s — Kantar advised that the combined market share of Aldi and Lidl now stands at a record 10%, with sales at these outlets shooting 16.5% and 19% higher respectively during the period.

And things look likely to get much worse for traditional outlets as the competition intensifies. Indeed, Kantar commented that “the discounters show no sign of stopping and, with plans to open hundreds of stores between them, they’ll noticeably widen their reach to the British population.”

Aldi and Lidl’s combined share has galloped from 5% in 2012, the body noted, and that it took them nine years to double their share from 2.5%, further underlining their stunning recent progress.

Round after round of profit-crushing price cuts are clearly doing nothing to prevent the steady erosion in Morrisons’ customer base, and the City expects the business to clock up a third consecutive earnings dip in the year to January 2016, this time by a chunky 14%.

The chain has shown it has very little in its arsenal to take on Lidl and Aldi, and with both store and online segments becoming ever-more competitive, I believe Morrisons is on course for further earnings woes in the coming years.

Plumbing to new depths

Similarly, I believe a backcloth of deteriorating revenues is likely to keep Rio Tinto (LSE: RIO) under the cosh for some time yet.

The problem of chronic oversupply across commodity classes has pushed energy and metal prices — and particularly that of bellwether copper — to fresh multi-year lows in recent days. And further dips are likely as China’s cooldown intensifies, in my opinion. Fresh rate cuts by the People’s Bank of China this week should have given markets some lift, but the failure of similar recent measures in stirring the economy is keeping the bears out in force.

Adding to the issue of massive supply/demand imbalances, investor appetite for commodities is also being hit by the rising strength of the US dollar. With chatter surrounding Federal Reserve rate hikes doing the rounds; traders piling into the currency as a ‘safe-haven’; and inflation taking off across emerging markets, I believe a stirring greenback is likely to provide a further headache for Rio Tinto looking ahead.

The City expects the mining giant to record a 49% earnings decline in 2015 in light of these factors. And given the lack of a cross-industry agreement to rein in rampant supply levels, and weak global economic growth failing to chip away at bloated stockpiles, I reckon Rio Tinto can expect prolonged earnings pain for some years to come.

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