Today I am looking at the share price potential of two London-listed heavyweights.
Unwanted item in the bagging area
Embattled retailer Sainsbury’s (LSE: SBRY) saw its stock price slump a further 4% between last Monday and Friday, and I believe additional weakness can be expected in the weeks and months ahead.
Sure, the business may be holding up better than mid-tier rivals such as Tesco and Morrisons — latest Kantar Worldpanel figures showed sales at Sainsbury actually advance 1.5% in the 12 weeks to November 12 — the firm’s decision to boost product investment, not to mention following a strategy of ‘low regular prices,’ proving successful in pushing the wolves back from the door.
Still, I remain sceptical over chances of a long-term recovery over at Sainsbury’s as discounters Aldi and Lidl continue their customer grab, and I fully expect their market shares to keep climbing as expansion takes off. Meanwhile, the store ramp-up programmes of premium outlets like Waitrose threatens to reduce the London firm’s customer base even further.
The City expects Sainsbury’s to endure a 16% earnings slide in the year to March 2016, and I believe — like Tesco this time last year — that the recent improvement in till activity will prove nothing more than a flash in the pan as the dreaded ‘price wars’ intensify. I therefore expect earnings to continue to slide for some time yet, making even an ultra-low P/E multiple of 11.1 times unattractive.
Drinks darling set to surge?
Like Sainsbury’s, drinks leviathan Diageo (LSE: DGE) emerged last week as one of the FTSE 100’s major losers. The company saw its share price fall 5% between last Monday and Friday, putting paid to the sterling share price advance of previous weeks — the stock added 15% from August’s lulls up to last week.
However, I believe this recent weakness represents a strong buying opportunity for savvy bargain hunters. Diageo announced last month that “momentum has improved” since the new fiscal year kicked off in July, assuaging investor concerns over cooling consumer spending power in emerging markets.
It is not all plain sailing over at Diageo, of course — the London-based business still faces the wrath of unfavourable currency movements, a massive problem given its pan-global exposure. But thanks its formidable stable of industry-leading beverages, from Johnnie Walker whiskey to Captain Morgan rum, the company carries terrific pricing power that very few can match.
Diageo is only expected to enjoy a 1% earnings improvement in the 12 months to June 2016. But this would represent a marked improvement from the 7% slumps experienced in both of the previous two years.
And given the vast sums shelled out on brand investment and geographic expansion, I believe Diageo remains a top growth prospect for years ahead, fully justifying a conventionally-high P/E rating of 21.3 times.