Why I’m avoiding FTSE 100 growth duds Rio Tinto plc, Centrica plc and Pearson plc

Royston Wild explains why FTSE 100 (INDEXFTSE: UKX) stalwarts Rio Tinto plc (LON: RIO), Centrica plc (LON: CNA) and Pearson plc (LON: PSON) should keep on struggling.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Today I am looking at three FTSE 100 (INDEXFTSE: UKX) stocks set for prolonged earnings pain.

Keep your ore out!

The chronic oversupply washing over its major markets makes Rio Tinto (LSE: RIO) a risk too far for savvy investors, in my opinion. The digger has seen earnings slip during each of the past two years, and a further 35% drop is currently expected for 2016. And I wouldn’t rule out further bottom-line troubles beyond this year.

Rio Tinto — like many of its peers — is steadily ramping up iron ore production, for example, and plans to raise a target of 330m–340m tonnes from its Australian operations in 2016 to 360m further out. And the company is intent on broadening production across the globe, having submitted a feasibility study for its gigantic Simandou iron ore project in Guinea just last week.

Should you invest £1,000 in Centrica right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Centrica made the list?

See the 6 stocks

But with Chinese demand indicators continuing to worsen, fears are rising over who will snap up this excess material, which is a worrying omen for future iron ore prices.

With the company changing hands on a P/E rating of 17.3 times — well above the benchmark of 10 times indicative of high-risk stocks — I think investors should give Rio Tinto plenty of distance.

Power problems

Fears over commodity prices are also whacking the earnings outlook over at Centrica (LSE: CNA).

True, Brent crude values may remain stable just below the $50 per barrel marker at present. But like iron ore, concerns over economic cooling in Asia — not to mention the US — threaten to send the benchmark tumbling, in my opinion. And OPEC and Russia’s refusal to cease ‘black gold’ production is casting a further pall over fuel values for the near-term and beyond.

But the prospect of prolonged revenues troubles at Centrica Energy is not the energy giant’s only problem. Indeed, the steady rise of Britain’s independent suppliers continues to dent the profits prospects of its British Gas arm, and Centrica saw its retail customer base slide by a extra 224,000 customers during January-March.

The number crunchers expect Centrica to rack up a 12% earnings dip in 2016, resulting in a P/E rating of 13.3 times. And, like Rio Tinto, I believe the risks facing the power play far outweigh the potential rewards at current prices.

Sales struggle

The extreme market challenges facing Pearson (LSE: PSON) also makes it a gamble too far, in my opinion.

The media group saw underlying revenues sink 4% between January and March as the impact of contract losses in its critical US market weighed. But problems in emerging markets cast further problems, forcing sales at its Growth division to fall.

With trading difficulties expected to endure, the City expects earnings to keep on dragging and a 24% bottom-line decline is chalked in for 2016 alone.

And despite Pearson’s massive restructuring drive, I reckon a P/E rating of 15.3 times represents poor value given the heavy lifting still to be achieved.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Centrica and Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Portrait of pensive bearded senior looking on screen of laptop sitting at table with coffee cup.
Investing Articles

A terrific 6% yield but a P/E of 225! What’s going on with BP shares?

Harvey Jones owns BP shares but sometimes wishes he doesn't. Could the FTSE 100 oil giant take him by surprise…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

The IAG share price has more than doubled in a year. Can it last?

As peak summer holiday season gets away, our writer thinks the IAG share price still looks potentially cheap despite more…

Read more »

Google office headquarters
Investing Articles

5 things to avoid when you start buying shares

Our writer shares a handful of possible missteps he thinks people ought to watch out for when they start buying…

Read more »

Female Tesco employee holding produce crate
Investing Articles

Up 31% in a year, what’s going on with the Tesco share price?

The Tesco share price has grown almost a third in just 12 months. Our writer wonders whether it's still attractively…

Read more »

National Grid engineers at a substation
Investing Articles

Does the National Grid share price really matter for an income-focussed investor?

In many investors' opinion, its dividend is key to the investment case for National Grid. Our writer reckons the share…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Invest like Warren Buffett? 3 easy ways to do it!

Christopher Ruane shares a hat trick of simple investing techniques learned from Warren Buffett that he uses when investing in…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

These 2 FTSE 100 stocks have doubled investors’ money in 2025! Too late to consider buying?

Harvey Jones is dazzled by two FTSE 100 stocks that have increased investors' money so far in 2025. Can their…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

2 FTSE 100 dividend stocks to consider for passive income growth that crushes the market!

Discover a pair of FTSE 100 dividend stocks that are tipped to outperform the UK stock market in 2025 --…

Read more »