Today I’m running the rule over three battered FTSE 100 plays.
Dig elsewhere
Mining colossus Rio Tinto (LSE: RIO) has enjoyed a stunning share price ascent in recent weeks, the stock gaining 14% in value during the past month alone.
A broad-based recovery in commodity prices has been the linchpin behind Rio Tinto’s upsurge. But I believe this giddy investor appetite is likely to leave many nursing large losses.
Rio Tinto has been helped in large part by a strong surge in iron ore prices since the start of the year — indeed, the steelmaking ingredient punched a 20% daily gain on Monday alone, driving prices comfortably above the $60 per tonne marker again.
Traders seem to be ignoring the market’s growing imbalance however. Chinese iron ore imports dived 10% month-on-month in February, reflecting the steady slowing of the country’s economy. Meanwhile major producers like Vale, BHP Billiton and Rio Tinto itself continue to increase output at a terrific rate.
Of course the market has been buoyed by news of further stimulus from the People’s Bank of China. But previous measures from the institution have failed to catch fire, meaning that recent rallies appear based more on hope than expectation.
These poor supply/demand dynamics threaten to keep revenues at Rio Tinto on the back foot for some time yet. And with the business still cutting capex targets and selling assets to ride out the storm, those expecting a return to growth in the longer-term may end up disappointed.
The lights are dimming
Like Rio Tinto, energy giant Centrica (LSE: CNA) is also suffering the impact of subdued commodity prices — the firm’s Centrica Energy upstream arm saw operating profits slump 61% last year as oil and gas values tanked.
But right now, the possibility of seismic legislative changes for its British Gas retail operations are occupying the company’s attention.
On Thursday the Competition and Markets Authority (CMA) recommended the rollout of price caps on pre-payment meters to help low-income households, as well as the launch of an Ofgem-controlled database to facilitate better deals for those who have been on standard tariffs for three years.
Sure, the CMA could have recommended much more severe action to curb the profitability of the so-called Big Six suppliers. But the organisation’s findings still ratchet up the competitive pressure on British Gas, whose customer base is already being steadily eroded by the rise of independent, promotion-led suppliers.
I believe the colossal risks facing all of Centrica’s main businesses makes the stock unattractive at the present time.
Past its sell-by-date?
Grocery mammoth Tesco (LSE: TSCO) enjoyed rare cause for cheer this week following latest Kantar Worldpanel retail numbers.
The researcher revealed that Tesco’s sales edged 0.8% higher in the three months to 28 February, the first rise in what seems like an age.
But as has long been the case, Tesco’s performance was again overshadowed by the stellar rise of the low-cost chains — Aldi and Lidl saw their revenues gallop 15.1% and 18.9% respectively. Consequently, Tesco’s market share slipped to 28.4%, down 300 basis points from the corresponding 2015 period.
And the budget firms’ market grab is set to keep intensifying as their expansion plans take off. In an environment increasingly dominated by who can offer the cheaper prices, I believe that Tesco is likely to endure prolonged earnings pain well into the future.