Today I am looking at three Footsie giants that I believe are in danger of prolonged earnings pain.
Supermarket strains
While checkout activity at Sainsbury’s (LSE: SBRY) has improved in recent months, the company still faces a colossal task to overcome the increasing fragmentation of the British grocery market.
Indeed, latest Kantar Worldpanel statistics showed sales at the London firm slip 0.4% during the 12 weeks to April 24th, bucking a steady trend of recent rises. By comparison, revenues at Lidl and Aldi galloped 15.4% and 12.5%, respectively, during the period.
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Sainsbury’s is scrambling to reduce its reliance on the ultra-competitive food market, exemplified by its takeover of Home Retail Group, a move that also significantly bolsters its multi-channel presence. But the supermarket still has its work cut out to transform the Argos operator, a business that is also being whacked by massive competition from the likes of Amazon.
Against this backcloth, City analysts expect earnings at Sainsbury’s to duck again in the year to March 2017, this time by a chunky 14%. A subsequent P/E rating of 12.5 is cheap but not cheap enough, in my opinion, given the company’s severe revenues pressures.
Out of juice?
Energy giant Centrica (LSE: CNA) faces a battle across all fronts to return to earnings growth. The steady erosion of its British Gas customer base has been a major headache for Centrica in recent years. Indeed, the relentless rise of promotion-led independent suppliers smashing revenues across the country’s ‘Big Six’ suppliers.
Despite the introduction of fresh, earnings-sapping tariff cuts, this trend continues to gather speed — Centrica’s British retail arm shed an additional 224,000 customers during January-March. And of course Centrica is also being whacked by the impact of subdued crude prices at its upstream division.
The City has subsequently chalked in a 12% earnings dip for 2016, the third successive fall if realised. While a P/E rating of 14 times is decent on paper, I believe this is far too expensive given the array of problems Centrica still has to solve.
Pump perils
The likelihood of prolonged commodity price pain is likely to remain a millstone around the neck of Weir Group (LSE: WEIR), too.
The pumpbuilder — whose products are used across the mining and energy industries — announced in its first quarter update last month that “trading conditions in oil and gas markets reflected further reductions in activity levels in all regions despite the limited improvement in oil prices in 2016.” Weir noted that the US onshore rig count sunk by 40% during the quarter.
Total like-for-like orders slumped 22% between January and March, the company advised, driven down by a 47% decline in oil and gas activity.
While orders in the minerals segment were better — underlying orders fell by ‘just’ 5% in the quarter — these are unlikely to improve substantially as colossal supply/demand imbalances across major commodity markets drag down prices, and with them capex budgets across the industry.
The City expects Weir to nurse a 29% earnings decline in 2016 alone. And I believe a subsequent P/E rating of 18.2 times is too heady given the firm’s patchy revenues outlook.
