The past 12 months haven’t been kind to shareholders of Tesco (LSE: TSCO), Burberry (LSE: BRBY) and EnQuest (LSE: ENQ) with share prices of each down more than 25%. Going forward, is the worst over for any of these three companies?
North Sea oil producer EnQuest has been the laggard of the group as shares have plummeted by over 60% in a year. While the company has successfully cut the cost per barrel of oil produced to between $26 and $28, this leaves little room to fund capex or make debt payments at current crude prices in the low $30 range.
Average daily production for 2016 is forecast to be some 35% higher than it was in the year-ago period as more wells come online. But the expiration of high-priced hedges means EnQuest’s bottom line will still be hit hard. While the average price of a barrel sold for the first half of 2015 was $77.5, this could fall to $53-to-$55/bbl in 2016 at current prices. A drop of this size will be hard for EnQuest to deal with as year-end net debt stood at a staggering $1.5bn. Although oil prices will rebound at some point, EnQuest’s concentration on the high-production-cost UK North Sea and its very poor balance sheet will inhibit share prices from appreciating significantly in the medium term.
Grocery sector pain
While EnQuest shareholders can at least comfort themselves with the fact that oil prices will inevitably rise at some point in the future, the outlook for the grocery sector as a whole looks much poorer. For Tesco, which is struggling with serious internal problems, this could mean years of stagnant or falling share prices. Although the company has pointed to an increase in domestic like-for-like sales over the Christmas period as proof of a turnaround, overall sales for the past quarter were still down. Worse, margins have continued to plummet as there appears to be no end in sight to the price wars between traditional grocers and discounters.
Operating margins in the UK for the last half year were down to an infinitesimal 0.77% and I see little reason for them to increase dramatically any time soon. With £9bn in net debt and pension deficits, few major assets left to offload and a bleak outlook for the industry as a whole, I see little reason to bank on shares of Tesco skyrocketing anytime soon.
Rewards ahead?
Although the economic slowdown in China and in emerging markets as a whole has crimped expectations for the luxury industry, Burberry has done well to avoid the worst of this. During the past quarter, Burberry saw a return to growth in mainland China and grew underlying sales overall by 1%. With management focused on cost-cutting rather than organic growth as the prime contributor to increased profits over the next year, share prices are unlikely to grow significantly during this time.
However, the overall story for Burberry looks positive as margins continue to increase, retail revenue continues to grow despite headwinds in key markets, and profits are forecast to grow 5% over the next fiscal year. Currently trading at 16 times next year’s earnings, the shares aren’t exactly cheap. But, a 3.3% yield and long-term growth prospects leads me to believe Burberry is more likely than EnQuest or Tesco to reward investors in the years to come.
