Today I am looking at three FTSE failures waiting to fall.
WM Morrisons Supermarkets
The steady slew of bad news concerning embattled grocer Morrisons (LSE: MRW) shows no signs of slowing. The business has been on the back foot for what now seems an eternity, and a broad range of new initiatives — from round after round of price slashing through, to extended opening hours and new loyalty schemes — has failed to prevent shoppers leaving in their droves. Indeed, latest Kantar Worldpanel stats showed sales slip a further 0.1% in the 12 weeks to July 20.
With sales at its megastores continuing to sag, Morrisons’ reliance on growth channels like convenience and online has become more amd ,pre pertinent. But rumours this week that the Bradford firm’s is to offload its 150 smaller M Local outlets to Greybull Capital underlines its failure in this particular sub-sector. On top of this, Sainsbury’s plans to extend its ‘Brand Match’ price scheme to internet customers increases Morrisons’ struggle in this ultra-competitive arena, too.
Thanks to this lack of clear growth drivers Morrisons is expected to clock up a third consecutive earnings decline in the year ending January 2016, and a 2% drop is currently predicted, leaving the retailer on a ridiculously-high P/E ratio of 16.4 times. But even if the supermarket were to be trading closer to the bargain barometer of 10 times, I would still resist piling my cash into the firm given that Morrisons has failed to provide even the smallest acorn of encouragement.
Rio Tinto
Like Morrisons, I reckon diversified digger Rio Tinto (LSE: RIO) is not for the faint of heart as conditions in critical markets deteriorate. Just today preliminary Caixin/HSBC Chinese manufacturing PMI numbers came in at 47.1 for August, the sixth consecutive reading below the expansionary/contractionary watermark of 50 and the lowest reading for six-and-a-half years.
The People’s Bank of China has stepped hard on the stimulus pedal in recent days to improve the outlook for its exporters, but this is not the first time Beijing lawmakers have tried to kick-start the economy, only for the economy to keep on tanking. And with resources producers across the globe still ramping up mining capacity despite a lack of demand, it is hard to see how commodity prices — and with it the earnings picture at Rio Tinto and indeed across the sector — will pick up any time soon.
The number crunchers currently expect Rio Tinto to suffer a 49% earnings collapse in 2015, leading on from last year’s 9% dip and leaving the company on an earnings multiple of 15.1 times. Again, such a reading is hardly shocking, but considering that metal prices continue to plummet — bellwether copper hit fresh six-year troughs below $5,000 per tonne this week — I expect a slew of fresh broker downgrades to materialise sooner rather than later, pushing this ratio still higher.
Cairn Energy
I believe that, just like Rio Tinto, fossil fuel explorer Cairn Energy (LSE: CNE) is poised to endure a fresh raft of pain as commodity prices worsen. The Brent crude index slipped to $45.50 per barrel today, fractionally above January’s multi-year lows, and a break below this level would appear an inevitability as the world drowns in excess oil.
Chinese data overnight has hardly helped Cairn Energy’s revenues outlook, but a stream of other data this week has conspired to sour the oil price. Latest Energy Information Administration numbers rshowed US inventories rise by 2.6 million barrels to 456.2 million — a hefty drop had been expected — while a rising rig count in the country is adding to fears of a prolonged glut as OPEC refuses to switch the pumps off.
The City does not expect Cairn Energy flip back into the black any time soon given these worsening fundamentals, and losses of 15.5 and 13.9 US cents per share are chalked in for 2015 and 2016 respectively. And with analysts becoming increasingly receptive to the idea of imploding crude prices — Citi remarked this week that the WTI index could fall “perhaps as low as the $20 range for a while” — I believe that even these poor numbers could be considered optimistic.
