Today I am looking at three FTSE 100 giants I believe should continue to sink.
Anglo American
Shares in diversified digger Anglo American (LSE: AAL) have enjoyed something of a renaissance during the past couple of weeks thanks to improving sentiment towards the mining space. The business has advanced 22% in less than a fortnight as bargain hunters have piled in, hoping that recent fears over the future of Glencore in particular have been overcooked.
I for one am not a member of that club, however, and fully expect the likes of Anglo American to clatter to fresh lows sooner rather than later. The London business remains particularly exposed to the coal and iron ore sectors, commodities which are expected to experience further price pain due to worsening supply/demand imbalances. Just last month Goldman Sachs slashed its long-term coal forecasts to $50 per tonne from $65 previously, warning that we may have already reached “peak coal.”
This is bad news for Anglo American, which generates 41% of total earnings from the iron ore and coal markets combined. As Chinese steelmaking activity continues to cool, I do not expect revenues at the mining giant to pick up any time soon. So even though Anglo American deals on a conventionally-cheap P/E ratio of 9.4 times — another 44% earnings decline is anticipated for 2015 — I believe worsening commodity markets should deter stock selectors from piling in.
Centrica
Similarly, I believe that electricity and gas provider Centrica (LSE: CNA) is an extremely-dicey share pick. The stock has also enjoyed a strong uptick in recent days, but I believe the downtrend of the past couple of years is here to stay — Britain’s ‘tariff-switching’ culture continues to pick up the pace, causing British Gas’ customer base to decline still further in January-June, to just over 14.7 million accounts.
Centrica is being forced to keep slashing its prices in order to stop the rot, not to mention curry favour with regulators who remain critical of the ‘Big Six’ operators’ pricing practices. But this is playing havoc with the company’s earnings outlook, and Centrica is expected to record an extra 7% decline in 2015, resulting in a P/E multiple of 12.6 times. This number is hardly shocking, but still fails to reflect the hard yards Centrica faces to get earnings moving again.
Sure, some may argue that Centrica’s market-busting dividends warrant serious attention. The power play is expected to shell out a dividend of 12p per share this year alone, yielding a handsome 5.3%. But I believe stock pickers should pay little heed to these projections — the firm’s decision to cut the dividend last year illustrates the rising pressure on the balance sheet, while Standard and Poor’s credit downgrade in August shows that things have hardly improved since then.
Tullow Oil
As well as problems at its retail operations, Centrica is also having to swallow profits pressure at its Centrica Energy downstream division. The London firm is not alone in this regard, naturally, as fellow explorer and producer Tullow Oil (LSE: TLW) will attest to. The driller saw revenues slump by more than a third between January and June, to $820m, and I believe the top line should continue to struggle along with the crude price.
Tullow Oil added to recent share price advances on Thursday after striking a deal with Gabon concerning its licence in the Onal Complex fields. The company regained its 7.5% stake in the licence, and has been given extensions in the fields until 2034. It has also attained access to two discoveries made inside the Ezanga block last year. Tullow Oil now expects to meet its West African production guidance of 66,000-70,000 barrels of oil per day for 2015, it advised.
Still, I believe the prospect of further oil price weakness makes the fossil fuel explorer an extremely risky bet. The Brent crude benchmark remains perilously perched around the $50 per barrel marker, and I reckon a fresh plunge lower is likely as economic indicators continue to worsen and Tullow Oil and its peers plan to keep swamping the market with fresh supply. Consequently I do not expect the London-based operator to swing back into the black any time soon.
