Today I am looking at three embattled big-caps set to endure prolonged earnings woe.
Royal Bank of Scotland Group
I believe that those expecting any meaningful earnings improvement at Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) will end up sorely disappointed. RBS remains hamstrung by enduring underperformance across its retail operations, not to mention an unforgiving divestment programme — these issues forced group revenues slumped 14% during January-March to £4.3bn. And while it is true that the company’s streamlining programme continues to rattle along, this scheme remains extremely expensive.
As a result RBS punched a hefty £446m loss during the quarter, sailing above broker forecasts. And the first quarter results also underlined the heavy financial impact that previous misconduct is having on the bottom line — the bank swallowed a further £856m worth of litigation and conduct charges during the period.
Broker Investec does not expect RBS to flick into the black any time soon, although it predicts a loss of 30.6p per share last year to improve to just 7.8p this year. And earnings of 10.8p per share are pencilled in for 2016. But given that the firm still has a number of hurdles to overcome, and it trades on an ultra-high P/E multiple of 32.7 times prospective earnings for next year, I believe investors should give the embattled bank short shrift.
J Sainsbury
Like the rest of the UK grocery sector’s mid-tier, I believe that Sainsbury’s (LSE: SBRY) remains a stock selection not for the faint of heart. Full-year results released today showed the company punch its first annual pre-tax loss for a decade, with massive profit writedowns and falling sales driving the London firm into the red to the tune of £72m. Like-for-like sales slumped a meaty 1.9% during the year to March 2015.
And the problem of intensifying competition looks set to worsen as both the premium and discount chains alike aggressively expand, exacerbating the chronic fragmentation already smacking the country’s established supermarket outlets. Indeed, trade bible The Grocer reported this week that Aldi and Lidl plan to open 53 new stores from this year; by comparison Tesco, Morrisons, Asda and Sainsbury’s will unveil just nine shops combined.
City analysts expect ongoing revenues woes to push earnings at Sainsbury’s lower once again in fiscal 2016, and a 13% decline is currently chalked in. The bottom line is expected to stagnate the following year, but with conditions undoubtedly becoming tougher and Sainsbury’s failing to come up with a meaningful turnaround plan other than that of yet more discounting, I reckon that even these insipid forecasts could be subject to heavy downgrades.
Antofagasta
I believe that copper miner Antofagasta (LSE: ANTO) is set to experience earnings pressures for the foreseeable future given that global economic growth continues to struggle, smacking demand for the company’s product, and swathes of new copper keep flooding the market.
Bank of America-Merrill Lynch has noted of the recent copper price uptick that “considering more policy support by Chinese authorities, and keeping in mind that demand usually strengthens seasonally after winter, prices may rally further through quarter two.” However, it added that “[this] does not change our view that copper fundamentals are structurally challenged, with prices likely coming under renewed pressure in… 2016 at the latest.” The broker expects the red metal to average $5,784 and $4,969 per tonne in 2015 and 2016 correspondingly; it was recently dealing around $6,350.
The City has accordingly downgraded its earnings forecasts for Antofagasta more recently, but still expect the business to record growth of 19% in 2015 and 30% in 2016. I am not so optimistic, however, and do not believe that elevated P/E multiples of 22.8 times for this year and 17.3 times for 2016 fully reflect the massive downside risks facing the resources colossus.