Today I’m considering the bounceback potential of three battered FTSE 100 (INDEXFTSE: UKX) giants.
Out of gas
Centrica’s (LSE: CNA) struggle again the steady rise of small, independent suppliers has been well documented. The energy giant’s British Gas customer base eroded by a further 1.5% during January-March, and this trend is likely to continue as its promotion-led rivals become bolder and more numerous.
Some would point to a recovering oil price as a reason to be cheerful, however, with Brent recently reclaiming the psychologically-crucial $50-per-barrel marker. But with global supply still edging higher, and insipid demand failing to take the heat out of bloated inventories, I don’t expect Centrica’s upstream divisions to drag the firm out of the mire any time soon.
The City expects Centrica to endure a third successive earnings drop in 2016, a 13% dip currently being forecast. And I believe further woes can be expected beyond this year.
Leave it on the shelf
Like Centrica, a steady erosion in its traditional customer base has kept grocery giant Morrisons (LSE: MRW) well on the back foot.
Greater selection in the grocery market has seen shoppers ditch the Bradford chain like nobody’s business. German chains Aldi and Lidl have proved unassailable in the fight to attract price-conscious customers, while more ‘upmarket’ rivals like Sainsbury’s have taken steps to improve product quality to further batter Morrisons.
And the entry of Amazon into the grocery space adds yet another curveball for Britain’s traditional outlets to negotiate.
The industry’s major players continue to fret over the fragmentation of the supermarket space, with Sainsbury’s chief executive Mike Coupe advising last week that “market conditions remain challenging.” He added that “pressures on pricing mean the market will remain competitive for the foreseeable future.”
Against this backcloth, I wouldn’t stake the house on Morrisons meeting current forecasts of a 31% earnings bounce in the current fiscal period.
Hitting turbulence
While it’s also battling challenging trading conditions, I believe Rolls-Royce (LSE: RR) has a brighter long-term outlook than the big-cap peers I’ve described above.
Chief executive Warren East recently commented that “despite steady market conditions for most of our businesses, 2016 continues to be a challenging year overall.”
Aftermarket revenues at Rolls Royce’s Civil Aerospace unit are flailing as airlines dump their older planes in favour of newer, more fuel-efficient jets. And the engineer’s focus on the wide-body plane market also means it’s losing out on rising demand for narrow-body craft.
On top of this, its marine division is also toiling against a backcloth of weak oil prices.
Still, I believe there are reasons to be optimistic over Rolls-Royce’s future. The company’s expertise across multiple markets continues to power the order book, which rose 4% in 2015 to end the year at £76.4bn. And I expect this to keep rising as the long-term outlook for commercial aeroplane demand remains strong.
But with an anticipated 59% earnings drop in 2016 producing a P/E rating of 24.4 times, many investors may consider Rolls-Royce too expensive given the hard work it faces to reduce costs and boost near-term revenues.