Signs of growing stress on the British retail landscape make Dixons Carphone (LSE: DC) a risk too far this year, in my opinion.
Shares in the electrical giant sank to two-year troughs in the immediate aftermath of June’s EU referendum. And while investor demand has perked up since then, the company still endured a 30% drop during 2016. And I reckon much more pain could be around the corner.
Just today Bank of England economist Andy Haldane commented that higher inflation “will in turn produce something of a squeeze on the spending power of consumers and may lead them to throttle back somewhat in their spending plans.” And the problem of rising inflation is likely to get worse as the UK’s troubled Brexit negotiations keep the pound under pressure.
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True, sales figures from the UK high street have been far better than forecast following the summer’s ballot. But with many shoppers now sitting on hulking credit card bills, and expectations rising of tough economic conditions in 2017 and possibly beyond, spending levels are likely to fall back in the months ahead.
This is likely to be a particular problem for sellers of ‘big ticket’ items, of course, and Dixons Carphone could see sales of its high-priced fridges, computers and televisions sink.
So while a forward P/E ratio of 11 times and 10.6 times for the periods to April 2017 and 2018 respectively fall well below the FTSE 100 average of 15 times, I reckon the strong possibility of swingeing downgrades to earnings forecasts could cause Dixons Carphone to keep dropping.
Prepare for turbulence
While market appetite for Rolls-Royce (LSE: RR) has moderated in recent months, the engineering colossus attracted a lot of bets from contrarian investors during the course of 2016, and this helped the stock rise 16% during the year.
But many of these hopeful investors would have been left anxiously tugging their collars following Rolls-Royce’s worrisome trading update in November. The business warned that there were “no signs of recovery yet in offshore oil & gas markets for Marine,” adding that the division’s order book remained “very weak” and that revenues are expected to continue dragging in 2017.
On top of this, Rolls-Royce continues to endure mixed demand at its Power Systems division, while moderating build rates for some aircraft is hampering engine sales for the company’s Civil Aerospace arm.
Rolls-Royce has famously embarked on a huge restructuring plan to help it ride out these current troubles, and the firm advised in November that annual cost savings are on track to hit the upper end of a targeted £150m-£200m.
However, evidence of a significant uptick in any of Rolls-Royces major markets still appears some way off, a situation that could see investors lose patience in the firm in 2017 and send the share price sinking again.
And Rolls-Royce isn’t exactly cheap on paper either, the firm changing hands on a P/E ratio of 19 times for the current year. I reckon this leaves Double R in peril of heavy weakness should predictions of a solid earnings rebound in 2017 begin to evaporate.
