Today I am looking at three FTSE 100 growth pups that investors should give short shrift.
BP
Thanks to a stagnating oil price, shares in fossil fuel colossus BP (LSE: BP) have trekked steadily lower in recent weeks. Fears of a Greek eurozone exit finally drove the Brent benchmark below $60 per barrel this week — indeed, prices were recently dealing at three-month lows around $56 — a long overdue descent given the massive supply/demand imbalance washing across the market, in my opinion.
But regardless of whether European leaders apply a fresh sticking plaster to the ‘Athens problem’, I believe that further oil price weakness can be expected as sluggish global growth saps fossil fuel demand, and pumps the world over remain in overdrive. Such a scenario is likely to play havoc with the earnings performance at BP, shrugging off the effect of massive cost-cutting and asset divestments.
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The City expects BP’s bottom line to bounce back from this year onwards, thanks in large part to a steady recovery in the crude price. But given that production from OPEC and the US continues to climb, I consider this stance to be fanciful at best, making BP’s P/E multiple of 16.6 times for 2015 ridiculously expensive — indeed, I would expect a reading closer to the bargain benchmark of 10 times to be a fairer reflection of the risks facing the firm.
Centrica
Like BP, energy provider Centrica (LSE: CNA) also faces fresh horrors across its Centrica Energy upstream division as the prospect of a diving oil price exacerbates the vast costs of its North Sea operations.
And even more worryingly for the power play, the Competition and Markets Authority’s long-running investigation into the industry has produced damning results just today. This found that the UK’s ‘Big Six’ electricity and gas providers had collectively overcharged domestic customers by an astonishing £1.2bn between 2009 and 2013. As well as floating the idea of a “transitional price cap,” a disastrous proposition for the likes of Centrica, the CMA once again encouraged households to shop around for a better deal.
Centrica has already seen its customer base haemorrhage in recent times thanks to the steady slew of bad headlines, and I expect this to continue as consumer groups, politicians and regulators alike keep their knives sharpened. Given these difficulties the number crunchers expect the company to experience a 6% earnings dip in 2015, following on from last year’s 28% collapse. Still, I do not believe a P/E ratio of 14.7 times fully factors in the prospect of enduring earnings woes facing Centrica.
Standard Chartered
In my opinion Asia-focussed Standard Chartered (LSE: STAN) remains a risk too far for savvy investors. Shares in the business have outperformed the majority of the FTSE 100 more recently as the bank’s exotic locations makes it less susceptible to the catastrophic fallout of another economic implosion in the eurozone.
Still, this does not make Standard Chartered immune to further revenues problems, not by a long chalk. The firm has failed to get a grip on the swirling headwinds washing around in emerging markets, forcing the company to significantly reduce its operations on the ground and initiate a $400m cost-cutting initiative. Such measures are a necessity given the fragile state of the balance sheet — StanChart’s common equity tier 1 ratio stood at a meagre 10.7% as of the close of 2014 — not to mention the uncertainty emanating from ongoing US regulatory probes. Rumours of a rights issue continue to do the rounds, not surprisingly.
The City expects Standard Chartered to print a 7% earnings drop in 2015, following on from the 28% reversal recorded last year. So even though this produces a P/E rating of just 11.8 times, I believe that the lack of obvious earnings drivers at the bank, combined with enduring worries over its capital strength, still makes the bank an unattractive share selection.
