Today I’m looking at two stocks in danger of falling through the floor.
Digger on the defensive
Investors in commodities plays like Rio Tinto (LSE: RIO) must surely be fearing the apocalypse as the downturn across raw material markets shows no signs of slowing. Shares in the business have conceded a whopping 45% during the past year and 20% since the turn of 2016 alone. But I believe the rout could be far from over.
Indeed, as prices across all of Rio Tinto’s major commodity segments continue to tank, why would anyone think otherwise? But then again Iron ore, a segment from which the business sources close to three-quarters of total earnings, has enjoyed a healthy rally in recent days and has bumped back above the $40 per tonne marker.
Yet the steelmaking ingredient remains precariously-positioned just above December’s six-and-a-half-year troughs of $38.30 per tonne, and the likelihood of further disappointing Chinese data could send prices hurtling lower again. Brokers at Citi have even suggested prices could fall as low as $28 in the near future.
Meanwhile, other critical commodities like copper and aluminium are also heading back towards the multi-year lows set in recent weeks.
Rio Tinto remains committed to hiking production in order to offset falling prices and pressure higher-cost producers out of business. Total iron ore output rose 11% in 2015 to 336.6m tonnes in 2015, the company announced yesterday. But this remains a risky long-term policy as worsening demand is failing to suck up already-abundant supplies.
The City expects Rio Tinto to follow a projected 51% bottom-line slump in 2015 with an extra 15% drop in 2016, leaving the business dealing on a P/E rating of 14.2 times.
I would consider a reading closer to the bargain benchmark of 10 times to be a fairer reflection of the risks facing the mining giant, however. And when you throw the prospect of further earnings downgrades into the mix (not to mention the likelihood of colossal dividend cuts) I believe Rio Tinto is a risk too far, even for the most courageous investor.
Supplier runs out of spark
But Rio Tinto isn’t the only FTSE 100 play suffering from an increasingly-fearsome revenues outlook.
Thanks to the steady rise of independent suppliers, power play SSE (LSE: SSE) has seen its subscriber base edge relentlessly lower in recent years, and the company saw the number of households on its books slip to 8.41m as of September. This was down by around 48,000 from a year earlier.
And SSE’s competitors are ratcheting up the pressure for it to introduce fresh rounds of profits-sapping price cuts. Just this week E.ON announced plans to cut gas prices by 5.1% with effect from February, while it also wheeled out a one-year dual fuel fixed product that it claims to be the cheapest tariff currently available.
SSE is anticipated to suffer an 8% earnings decline in the 12 months to March 2016, leaving the stock dealing on a P/E rating of 12.5 times. Given that the business also faces the threat of draconian action from Ofgem thanks to claims of aggressive charging practices, I reckon savvy investors should continue to give the supplier short shrift.
