Why Savvy Stock Pickers Keep Giving Tesco PLC & Rio Tinto plc A Wide Berth!

Today I am running the rule over two battered FTSE bangers.

Retailer on the ropes

Quite why anyone would wish to invest their hard-earned cash in Tesco (LSE: TSCO) remains beyond me, I’m afraid. Week after week the embattled supermarket is struck by waves of disappointing industry data, and the latest Kantar Worldpanel numbers, released last Tuesday, continued this worrisome trend.

The research house’s data showed Tesco get off to a terrible start during the critical Christmas period, its sales dipping 3.4% in the three months to December 6, pushing its market share down to 28% from 29.1% a year ago. The latest data also indicate an acceleration from the 2.5% slide reported by Kantar Worldpanel  in November, and the 1.7% decline in October.

Once again the breakneck rise of the budget retailers was confirmed, with sales over at Aldi and Lidl sprinting 15.4% and 17.9% higher respectively during the latest 12-week period. But Tesco is losing its lustre with affluent customers as well as value hunters, as illustrated by Waitrose’s 2.7% sales uptick.

Clearly chief executive Dave Lewis’ honeymoon period has well and truly run out of steam, and despite the introduction of new advertising campaigns, revamped loyalty schemes and fresh rounds of earnings-hobbling price cuts, Tesco is still suffering a severe identity crisis that is playing havoc with its sales performance.

The City expects Tesco to endure a 45% earnings slip in the year to February 2016, leaving the supermarket dealing on a P/E rating of 34.4 times. Such an elevated reading is quite ridiculous given the increasingly challenging conditions in the British consumer sector, and I reckon Tesco’s share price has much more ground to concede.

Commodities trade under the cosh

Like Tesco, I believe that diversified mining goliath Rio Tinto (LSE: RIO) also faces the prospect of prolonged revenues pain.

Quite when commodities markets reach the bottom is nigh-on impossible to predict, but one thing is for sure: until data from resources glutton China begins to pick up, and all major producers scale back their activity, prices across plenty of segments still have lots of room left to fall. Indeed, oil, iron ore and many base metals have all plunged to fresh multi-year lows in recent weeks.

Given this environment the number crunchers expect Rio Tinto to suffer a 48% earnings dip in 2015, creating a P/E rating of 12.1 times. And predictions of a third successive slip next year — this time by a chunky 15% — drives the earnings multiple to 14.2 times.

Like Tesco, I believe that a rating below the bargain-basement barometer of 10 times would be a fairer reflection of the risks facing Rio Tinto in the years ahead.

Sure, some would argue that the mining giant’s colossal dividend yields more than justify such P/E multiples. Rio Tinto is anticipated to raise last year’s 215 US cents per share reward to 222 cents in 2015 and to 226 cents next year, yielding 7.1% and 7.3% respectively.

But I believe investors should take these projections with little more than a pinch of salt.

The scale of capex reductions and asset sales at Rio Tinto provide an illustration of the firm’s battered balance sheet — net debt clocked in at $13.7bn as of June — and with earnings pressure set to endure, I reckon the business will be forced to slash the dividend sooner rather than later.

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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.