The recent market slump has sent shares of many great companies down to bargain prices. Should investors seeking out great deals consider J Sainsbury (LSE: SBRY), Glencore (LSE: GLEN), and Standard Chartered (LSE: STAN)?
Basket of woes
The grocery sector has been a perilous place for investors to put their money over the past half decade. The rise of discounters and online challengers has crimped margins and left the traditional grocers scrambling to right the ship. Sainsbury’s has definitely done better than its major competitors, but has only recently begun to articulate a vision for growth rather than mere survival.
Sainsbury’s management believes the way forward is the £1.3bn takeover of Argos parent Home Retail Group. The thinking goes that Sainsbury’s will be able to use Argos’s enviable delivery network to bring click-and-collect customers into large out-of-town stores with empty space. However, I don’t believe this deal answers the larger questions facing both brands. Argos is only half as profitable as it was five years ago due to competition from the likes of Amazon, and I can’t imagine this improving any time soon. And the outlook for Sainsbury’s core business of food sales remains grim at best as margins continue to slide, down to 2.7% in the latest report. Although Sainsbury’s continues to produce enough profits to cover its 4.3% yielding dividend, I don’t believe the shares are a bargain at 11 times forward earnings due to very limited growth prospects.
Deep in debt
Embattled miner Glencore acted more quickly than rivals to the low commodities prices and wisely halted dividends, sold assets and undertook a rights issuance to shore-up the balance sheet. However, these efforts weren’t enough to avoid a series of credit rating downgrades to one notch above junk status. While this won’t have a material impact on business, it does show the severity of the problems remaining. Even achieving management’s year-end targets would still leave more than $18bn of net debt to be paid off. Refinancing of loans and strong cash flow from the trading arm will ensure Glencore will be able to tread water through several years of low commodities prices. However, at the end of the day every miner’s future hinges on commodities prices increasing substantially. And while this may happen in the medium term, there are less-indebted competitors, like BHP Billiton, which will be in a better position to reap the rewards and pass them on to investors when this time comes.
Hitting the (capital) buffers
While Glencore only has to deal with falling commodities prices, Standard Chartered has to deal with high exposure to failing loans in both emerging markets and the commodities sector. The bank has been hit hard by these events, with third quarter results showing a $139m loss compared to a $1.5bn profit in the previous year. Worryingly for the lender, this is increasing talk in the City of last autumn’s rights issuance not being large enough to sustain sufficient capital buffers. With further pain expected in both commodities and emerging markets, Standard Chartered will almost certainly suffer from increasing losses due to non-performing loans. Given these significant issues, I would be avoiding the shares even if they weren’t priced at 11 times forward earnings, pricier than healthier competitors such as Lloyds.