Outsourcing colossus Capita Group (LSE: CPI) proved to be one of the FTSE 100’s biggest casualties in 2016 as it served as a reminder of the tough conditions facing Brexit Britain.
Capita saw its share price tank 57% during the course of the year. But I don’t believe the worst may be over yet.
The support services play was forced to downgrade its profit expectations twice in quick succession in late 2016 as businesses paused their spending plans in the wake of the Leave vote. And in its latest December update, Capita advised that the headwinds facing the business “will affect trading performance in the first half of 2017.”
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While investor appetite may have perked up since the start of January, signs of further weakness in the sector cause me to remain cautious on Capita. Indeed, Mitie Group (LSE: MTO) warned in January that it continues to be hit by client deferrals and delays to investment plans.
I believe a similarly-disappointing full-year update from Capita — currently slated for Thursday, March 2 — could slam the outsourcer’s share price back into reverse.
The City expects Capita to follow a 16% earnings slip in 2016 with a 7% dip in the current period. And I reckon share pickers should be braced for extended turmoil as Britain’s self-extraction from the EU looks likely to be a prolonged one, making Capita an unappealing selection regardless of its cheap P/E ratio of 8.6 times.
Big shop of horrors
Although retail conditions remained largely resilient in the months after June’s referendum, Marks & Spencer’s (LSE: MKS) ongoing troubles at the tills couldn’t prevent its stock price from slumping in 2016.
The business saw its shares lose 23% of its value during the course of the year. And I believe further trouble could be around the corner as consumers’ spending power takes a hit.
In a possible sign of things to come, British Retail Consortium data this week showed total retail sales edging just 0.1% higher in January, a sharp slowdown from the 3.3% rise punched a year earlier. And last month’s figure also trailed the three-month average of 1.1% by some distance.
Consumer activity is likely to be hampered by a combination of rising inflation and elevated consumer caution in the months ahead, and particularly as shoppers pay down the credit card mountain that spiked towards the end of last year. As a result Marks & Spencer — which is already struggling against a backcloth of rising competition — may continue to see demand for its fashion lines flounder.
The City certainly expects its bottom line to keep struggling under these conditions, and has chalked-in earnings dips of 17% and 1% for the years to March 2017 and 2018 respectively.
I reckon a subsequent forward P/E ratio of 11.6 times fails to address the strong possibility of earnings woes extending beyond this period, leaving M&S’s stock price in danger of further weakness.
