While news of November’s OPEC output freeze has seen investors piling back into London’s oil producers and support service providers, the Weir Group (LSE: WEIR) share price recovery began long before the Doha agreement came into being.
Indeed, the pumpbuilder has seen its share price rocket almost 140% since last January’s multi-year troughs. But I reckon investors may be a bit premature in piling back into the stock as market conditions remain difficult.
Weir announced in November that core markets had begun to improve during the third quarter, particularly in North America. But is also said that “volume growth was offset by sustained pricing pressure which, combined with the division’s focus on reducing inventory and maximising cash generation, restricted flow through to profits.”
The City expects Weir to bounce back into the black in 2017 with a 30% earnings rise. But this still results in a P/E ratio of 24.6 times, sailing above the benchmark of 15 times that’s widely considered attractive value.
And given the challenges Weir faces to meet current forecasts, I believe this is far too expensive.
I also reckon car retailer Inchcape (LSE: INCH) faces an increasingly-troubled outlook as demand for automobiles is predicted to slump.
Car sales have remained resilient despite the summer’s Brexit vote. Indeed, the Society of Motor Manufacturers and Traders (SMMT) recently advised that an annual record of 2.7m new vehicles were registered in the UK in 2016.
But the SMMT warned that sales are likely to duck by between 5% and 6% in the current year as the slumping pound damages demand. And dealers like Inchcape are likely to have to keep slashing forecourt prices to stop sales falling off a cliff as household budgets come under increasing strain.
The City expects earnings to rise 10% in 2017 at the car giant. But I believe investors should take this reading with a pinch of salt, and with it a conventionally-cheap P/E ratio of 11.9 times. I reckon market appetite for the stock could seep lower in the months ahead.
With Tesco, Sainsbury’s and Morrisons all releasing better-than-expected trading updates in recent days, hopes have risen that the outlook for the grocery market’s established players is becoming rosier after years of sustained sales pressure.
I for one don’t subscribe to this line of thinking however, and I believe the spectre of rampant inflation as we move through 2017 — allied with the ambitious expansion plans on the ground and in cyberspace of discounters Aldi and Lidl, and US online giant Amazon — leaves the operators on dodgy footing.
Internet specialist Ocado (LSE: OCDO) is already struggling to cope with the ongoing fragmentation on the British supermarket scene, and announced in December that, while the volume of average weekly orders leapt 17.6% during the 16 weeks to November 27, the average order value fell 2.9%.
The City certainly expects Ocado’s woes to remain strung out, and expect the retailer to follow a 27% earnings slide in the year to November 2016 with a further 30% drop in the current fiscal year. And this forward projection results in an unfathomably-high P/E ratio of 256.2 times.
This leaves Ocado in serious danger of a stock price correction should, as I expect, trading conditions remain tough for Britain’s supermarkets.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Weir. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.