Why The Risks Outweigh The Possible Rewards At Tesco PLC & Tullow Oil plc

Today I am looking at two FTSE 100 giants in danger of prolonged profits woe.

Supermarket still slipping

The arrival of chief executive Dave Lewis at Tesco (LSE: TSCO) back in the autumn of 2014 was expected to herald a new age at Tesco, erasing the memory of PR disasters such as the horsemeat scandal and ill-fated foreign ventures such as those in the US and Japan.

But like his predecessor Philip Clarke, Lewis has proved unable to turn around Tesco’s ailing fortunes, as a steady string of sales-boosting initiatives have failed to hit the mark. Measures such as expanding its ‘Click & Collect’ services, launching its ‘Price Promise’ discount scheme and reducing the number of products on its shelves have all failed to rebuild its customer base.

Latest data from researcher Nielsen showed Tesco’s sales slump 1.5% in the four weeks to January 30th, an embarrassing result compared with the 18.7% and 17.2% advances recorded at Aldi and Lidl respectively. And with both chains embarking on ambitious, multi-year expansion schemes this year and beyond, I believe this worrying trend is only likely to continue at Tesco.

The City expects the supermarket to suffer yet another earnings slide in the year to February 2016, this time by a mountainous 45%. Such a reading leaves Tesco changing hands on a P/E rating of 34.4 times, sailing way above the benchmark of 15 times or below that indicates reasonable value.

Given that Tesco has given very little reason for investors to expect a revenue rebound any time soon, I believe it is difficult to justify piling into the stock at current price levels.

Oil play under pressure

And the picture is hardly any better at fossil-fuel giant Tullow Oil (LSE: TLW) either, with nosediving crude prices casting a huge shadow over the firm’s near-and long-term growth outlook.

Sure, Brent oil may have marched away from the $30-per-barrel marker in end-of-week trading, but broker sentiment seems to suggest fresh heavy weakness is in the offing as global inventories soar — data this week showed inventories at Cushing hit new record highs around 65 million barrels.

Goldman Sachs’ head of commodities research Jeff Currie told Bloomberg this week that crude values could even have to fall below $20 per barrel before producers put a cork in the ground. “Once you breach storage capacity, prices have to spike below cash costs because you have to shut in production almost immediately,” Currie noted.

Tullow Oil is expected to see the bottom line surge from losses of 113.6 US cents per share in 2015 to earnings of 14.4 cents this year, with first oil at its colossal TEN Project in Ghana scheduled for July or August.

But with oil values looking likely to remain in the doldrums for some time yet, I believe those expecting such a seismic earnings shift at Tullow Oil could end up severely disappointed. And with the business dealing on an elevated P/E rating of 24.8 times, I reckon the risks greatly outweigh the potential rewards at the current time.

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