Increasingly-distressing signals concerning the oil market imbalance would cause me to cast Weir Group (LSE: WEIR) adrift in the weeks ahead.
Weir announced last month that revenues dropped 2% in 2016, to £1.85bn, a result that forced pre-tax profit 22% lower to £170m. And Weir faces the prospect of further weakness as oil producers keep the pursestrings tightly closed in anticipation of depressed oil prices persisting long into the future.
This is reflected by orders last year also remaining subdued over the past year, orders falling 8% in 2016 to £1.86m.
Weir advised that it had observed “signs in our mining and oil and gas markets that point to a cyclical upturn.” But competitive pressures in fossil fuels remain significant and weak spending outside of the US casts a pall over the top line, despite a resurgent North American shale segment.
So while City brokers expect Weir to rebound from four years of earnings drops on the spin, with rises of 37% and 17% in 2017 and 2018 respectively, the company will have to see orders soar to meet current projections.
And a reversing oil price during the past month has dampened hopes of a sustained demand turnaround for Weir’s high-tech products.
So I reckon subsequent P/E ratios of 21.9 times and 17.3 times, well above the benchmark of 15 times broadly considered decent value, leave Weir’s share price in danger of slumping. And particularly so should next month’s financials (scheduled for Thursday, April 27) disappoint.
I believe an increasingly-murky outlook for the UK retail sector should encourage investors to shift out of Marks & Spencer Group (LSE: MKS) in the weeks ahead, particularly as first-quarter financials (marked in for Wednesday, May 24) are likely to confirm the company’s tough outlook.
M&S has been struggling for years now to get its womenswear ranges moving off the shelves thanks to out-of-touch marketing and styling, and has been chucking shedloads of cash at its fashion teams. And the retailer’s recovery strategy is going to become even tougher to achieve as broader economic pressure mounts.
But demand for its wearable products is not the only concern as pressured household budgets could see people switch away from its high-priced edible items and into the arms of cheaper retailers, forcing M&S into reducing prices. The Food division has been its only reliable growth outlet in recent times.
The Square Mile certainly expects earnings woes to continue into the future, and a 14% decline during the 12 months to March 2016 is expected to be followed with drops of 17% and 1% this year and next.
Consequent P/E ratios of 11.6 times and 11.7 times may be attractive on paper. But with rising inflation pressuring shoppers’ appetites, and mid-tier clothiers becoming embroiled in an ever-bloodier price war, I reckon current earnings forecasts are in danger of being slashed in the months ahead, making these cheap multiples redundant.
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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.