Today I am running the rule over two Tuesday headline makers.
Turnaround or twitch?
Hopes that embattled grocer Sainsbury’s (LSE: SBRY) could finally be turning the corner has seen shares values explode in recent weeks. Indeed, the stock is currently dealing at levels not visited since last April, with investor appetite helped by a landmark trading update on Tuesday.
While like-for-like sales growth of 0.1% in the fourth quarter is hardly seismic, this represents the first quarterly rise for two years and underlines the firm’s steady improvement at the checkout. A sales drop of 2.1% in the first quarter improved to 1.6% in quarter two, and again to 0.4% between October and December.
Demand at the firm’s clothing and entertainment aisles surged 10% and 11% respectively in the period. Meanwhile, sales across the online channel galloped 14% higher during the quarter.
And while massive brand investment in its food items is also paying off, Sainsbury’s still has plenty of work ahead of it just to stand still. Indeed, chief executive Mike Coupe advised that “the market will remain competitive as food deflation continues to impact sales growth.”
We have seen similar sales resurgences at Tesco in recent times, but these have petered out as the popularity of Aldi and Lidl has intensified. And the discounters’ aggressive store and internet expansion plans are sure to keep Sainsbury’s on its toes long for much longer.
The business is expected to follow a 12% earnings fall for the year to March 2016 with a 3% drop in 2017, the latter figure creating a P/E rating of 12.5 times. I believe that Sainsbury’s remains in severe danger of prolonged slippage despite today’s bubbly results.
Driller still in danger
Fossil fuel giant Cairn Energy (LSE: CNE) also greeted the market with better-than-expected results in Tuesday business. But, like Sainsbury’s, I believe the possibility of severe revenues trouble makes the stock a risk too far.
Cairn Energy advised that losses before tax narrowed to $497.8m in 2015 from $559.1m in the prior year. The business also advised it will concentrate on moving its Senegalese assets towards commercialisation in 2016, following on from positive testing results earlier this month.
As well, Cairn Energy remains on course for maiden production from its Kraken and Catcher projects in the North Sea in 2017, it advised.
However, Cairn Energy is expected to keep making losses through to the end of next year, or so say the City’s army of analysts. And I believe forecasts of first revenues in 2017 could miss the target should crude prices continue to tumble, a very real possibility as bloated market supplies continue to grow.
At the moment the company is well capitalised, with Cairn Energy reporting net cash of $603m as of December. But while this makes the business better capitalised than many of its peers, the wider state of the oil market — allied with the high capex costs related to its operations — still leaves Cairn Energy on shaky footing, in my opinion.