Today I am looking at three London heavyweights offering very little bang for one’s buck.
Digging a hole
With commodity markets continuing to tank, I believe the earnings outlook at diversified miner Anglo American (LSE: AAL) is perilous at best, to put it politely. Yet I do not believe the current share price fully reflects the risks facing the firm — Anglo American is expected to suffer a 44% bottom-line decline this year, a fourth successive drop and resulting in a P/E rating of 12.4 times.
I would consider a reading in line with, or below, the bargain barometer of 10 times to be a fairer indication of the upheaval Anglo American faces, particularly if the Chinese economic slowdown intensifies. Indeed, prices of iron ore and coal — by far the company’s two most important markets — have begun to sink again this week as steelmaking activity in the country continues to cool.
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The iron ore price has halved since the turn of the year and was recently dealing at $55 per tonne, forcing the boffins at ANZ to revise down their average price forecasts for 2016 and 2017 to $52 and $54 respectively. The broker also cut its coal price predictions for the period, not surprisingly, and I expect earnings projections over at Anglo American to receive the same treatment as supply/demand dynamics worsen.
Power play shorting out
I reckon that energy provider SSE (LSE: SSE) is also a dangerous selection for those seeking copper-bottomed earnings expansion. But like Anglo American I do not believe the potential for further top-line travails is being factored into the stock price. A 10% earnings drop is currently predicted for the 12 months to March 2016, producing an unattractive P/E multiple of 12.4 times.
SSE is being dragged into an increasingly-bloody tariff war to stop its client base haemorrhaging — the firm lost another 90,000 clients during April-June — as British customers become increasingly attracted to the idea of switching providers. On top of this, the prospect of profits-crushing action from regulator Ofcom casts further uncertainty over the firm’s growth outlook.
Sure, some would argue that even if both Anglo American and SSE offer poor value from a pure earnings perspective, that this shortfall is more than offset by the vast dividends currently being forecast. The miner is expected to chuck out a payment of 75 US cents per share in 2015, down from 85 cents in 2014 but still yielding a handsome 6.9%. And SSE’s projected reward of 90.3p per share for the current period creates a bumper 6.3% yield.
But with estimated earnings barely covering these readings — Anglo American and SSE carry meagre dividend coverage around 1.2 times — and both company’s sporting colossal debt levels, I believe investors shouldn’t put the mortgage on these predictions being met.
Bank lacks growth drivers
And investors in Royal Bank of Scotland (LSE: RBS) cannot even fall back on unrealistic payout projections to justify poor P/E values. The financial play has failed to shell out a dividend since the 2008/2009 banking crisis gutted the balance sheet, and the City is split over whether a dividend is expected in the near future.
And Royal Bank of Scotland’s poor growth prospects hardly shore up confidence that payments are forthcoming, either. Thanks to the impact of aggressive streamlining, the company can no longer expect revenues to stream in, unlike its rivals who can also look to lucrative emerging markets and stronger e-banking propositions to boost earnings.
A prospective P/E rating of 11.3 times for 2015 is hardly shocking, but I believe Royal Bank of Scotland’s industry peers like Barclays and Lloyds carry far superior earnings potential, not to mention a more attractive price — these firms currently deal on forward P/E ratios of 10.8 times and 8.4 times respectively.
