Let’s look at the share price potential of two recent climbers and see whether they have scope for further rises.
Power play on the push
It came as little surprise that electricity network operator National Grid (LSE: NG) emerged last week as one of the FTSE 100’s rare winners. Against a backdrop of collapsing commodity prices, spurred by further rounds of hand-wringing data from China and the eurozone, investors once again flocked to the safety of the utilities sector.
National Grid saw its share price advancing 0.4% between last Monday and Friday as a result. While the rise was hardly earth-shattering, I believe further strength can be expected as concerns over an accelerating slowdown in the global economy, not to mention the implications of Federal Reserve monetary tightening, keeps trader nerves on edge.
National Grid is expected to ratchet up earnings growth of 4% and 1% for the years concluding March 2016 and 2017, respectively. That means respective P/E ratings of 14.9 times and 14.7 times – any reading around or below 15 times is widely considered great value.
And thanks to the effect of RIIO price controls in the UK, not to mention heavy investment in its asset base on both sides of the Atlantic, I believe National Grid should remain an efficient earnings-creator in the years ahead, giving further fuel for its generous dividend policy.
Indeed, the London-headquartered firm is anticipated to lift last year’s 42.87p per share dividend to 43.65p in fiscal 2016, yielding a mountainous 4.8%. And this figure leaps to 5% for 2017 amid predictions of a 44.7p reward.
Sinking crude casts a long shadow
One of the more surprising winners to emerge from last week’s commodities rout was engineer Wood Group (LSE: WG). The company, which supplies a range of engineering and support services to the oil and gas industry, saw its share price ascend 4.4% in the run-up to last week’s trading update.
However, I expect the shares to resume their downtrend sooner rather than later as commodities markets toil and fossil fuel producers scale back their spending plans even further. Wood Group affirmed its confidence in its full-year earnings forecasts on Thursday, although the firm rather worryingly added that it’s braced for “a prolonged period of challenging market conditions.”
And with good reason. Brent crude toppled to fresh six-and-a-half-year troughs below $37 per barrel earlier today, meaning black gold prices have shed $10 in less than three weeks. And when discussing the collapsing oil price last week, former BP head Lord Browne told Bloomberg that prices could even fall all the way back to $20 per barrel.
Against this backcloth, I believe companies like Wood Group remain a risk too far at the present time. Earnings are expected to tip 26% lower in 2015 and by an additional 12% next year, producing P/E ratings of 10.7 times and 12.1 times, respectively.
I believe the strong prospect of further earnings downgrades makes Wood Group a hugely-unappealing stock selection. And while the company reiterated its intention to hike the dividend by double-digit percentages in 2015, I reckon shareholder rewards are in danger of taking a whack either this year or beyond should crude continue to crumble.