Today I am looking at three big-cap basket cases set to toil.
WM Morrison Supermarkets
The impact of intensifying competition has seen Morrisons (LSE: MRW) clock up two years of colossal earnings dips, culminating in last year’s calamitous 51% slide. Although I believe expansion from the discounters and premium chains alike, not to mention fierce competition in the online and convenience segments, should keep sales under pressure at the Bradford firm, the City seems convinced that Morrisons will get back on the front foot from this year onwards.
Earnings growth of 8% is currently chalked in for the year concluding January 2015, and which surges to 19% in 2016. I find such optimism baffling, but even if these projections were to be met, Morrisons still changes hands on elevated P/E multiples of 16.8 times and 14.3 times prospective earnings. I would consider a reading closer to the value benchmark of 10 times to a be a fairer reflection of the multitude of problems the firm is battling.
Latest Kantar Worldpanel statistics showed sales at Morrisons fall yet again in the 12 weeks to March 29, this time by 0.7%. The retailer is pulling out all the stops to put an end to this enduring trend — just last week it announced plans to recruit 5,000 more staff to put on the shop floor — but until it develops a USP to attract customers back through its doors, I am convinced that earnings should keep on disappointing.
SSE
Energy supplier SSE (LSE: SSE) has seen its customer base take a battering in recent times as the growing popularity of independent suppliers, combined with initiatives by the government and consumer groups to encourage tariff switching, has struck a chord with price-conscious consumers. Indeed, the firm saw the number of users on its books continue to slide up until the end of last year, dropping to 8.71 million as of the close of December from 9.1 million nine months earlier.
Accordingly City analysts expect SSE to punch a 5% earnings decline in the year ending March 2015, and a further 2% slide is pencilled in the for the following year. The business is anticipated to post a slight 2% bounceback in fiscal 2017, but with politicians still sharpening their knives to curry favour with voters — and Ofgem still to conclude its study into the profitability of SSE and its peers — I reckon that the bottom line should continue to suffer.
It is certainly true that SSE does not trade at exorbitant prices — for 2016 and 2017 the business carries P/E multiples of 13.5 times and 13.4 times correspondingly, within the boundary of 15 times which represents decent value. Still, I reckon that the electricity giant runs the risk of significant earnings downgrades which could send these figures spiralling out of control.
Anglo American
I believe that diversified earnings play Anglo American (LSE: AAL) will continue to struggle in tandem with worsening supply/demand dynamics across its key markets. For one, the effects of sluggish growth in the world economy, combined with the galloping trend towards decarbonisation, looks set to keep coal off-take — the miner’s largest single market and responsible for almost a fifth of total revenues — muted in the years ahead.
The City expects the earth mover to clock up a fourth annual earnings decline in 2015, and a 35% earnings slide is currently mooted. But quite why the number crunchers expect Anglo American to return in 2016 with a 32% surge is beyond me, what with prices of iron ore, copper and platinum — also critical segments for Anglo American — also suffering the effects of deteriorating fundamentals.
Anglo American currently changes hands on a P/E multiple of 14.3 times for this year, although this shuttles to a much-improved 9.9 times for 2016. But as I have said, I believe that expectations of a sound bounceback any time soon are wildly wide of the mark as output across many of the company’s critical sales-drivers continues to climb.
