As creeping inflation in the UK adds pressure to Britons’ household budgets, I reckon energy giant SSE (LSE: SSE) can expect its customer base to keep eroding.
The power play announced in January the loss of a further 50,000 accounts during October-December, pushing the number on its books to 8.08m.
And latest data from trade body Energy UK suggests that the Big Six operators’ grip is continuing to loosen. The total number of switches increased 31% during January, the organisation noted this month, to 345,000. And around 100,000 of switchers flocked to one of the 45 small-or-mid-sized providers currently trading in Britain.
The City expects SSE to endure a second successive earnings slip in the year to March 2017, and a 1% decline is currently forecast. Given that the road back to bottom-line growth is becoming ever tougher, I reckon the firm is an unappealing stock selection despite a conventionally-low forward P/E ratio of 13 times.
False dawn?
I also believe intensifying competition in the grocery sector makes WM Morrison Supermarkets (LSE: MRW) a risk too far.
At first glance my caution may be somewhat misplaced, however. Chief executive David Potts has gone some way to reinvigorating Morrisons’ popularity with shoppers since his appointment in 2015.
Indeed, latest Kantar Worldpanel data showed sales at the Bradford firm were up 1.9% during the 12 weeks to January 29, Morrisons’ tills outperforming those of their so-called Big Four rivals during the period. And this saw the firm’s market share rise for the first time in 18 months.
Morrisons’ recent resurgence is thanks in no small part to the massive investment made in its The Best premium range. But the Northern business will need to keep pulling rabbits out of hats given the rate at which the low-price chains are expanding in the UK — Aldi plans to have 1,000 outlets up-and-running within the next five years.
While the City expects earnings to shoot 11% higher in the period to January 2018, it is far too early to say Morrisons is out of the woods yet. And I reckon a forward P/E ratio of 20.6 times is much too expensive given the firm’s uncertain long-term outlook.
Prepare for a shock
The likelihood of severe belt-tightening could significantly dent demand for Dixons Carphone’s (LSE: DC) high-priced goods in 2017 and beyond, in my opinion.
As well as battling against broader inflationary pressure, shoppers are also likely to see their appetite reduced by a steady cooling in wage growth. Data this week showed pay packets up 2.6% last month, falling 20 basis points from December. And broader Brexit-related uncertainty adds an extra layer of uncertainty for the retail sector.
Dixons Carphone is expected to keep growing earnings over the next few years, according to City estimates, starting with a 7% advance in the year to April 2017. But I reckon these expectations are built on extremely sandy foundations, and think the electricals play is a risky pick regardless of a cheap forward P/E multiple of 9.7 times.