Can Glencore plc and J Sainsbury plc make you rich?
Today I'll be discussing the outlook for multinational mining giant Glencore(LSE: GLEN) and the UK's second-largest supermarket Sainsbury's(LSE: SBRY). Can either of these FTSE 100 giants make you rich?
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Growth priced-in
Diversified mining giant Glencore updated the market yesterday with its first quarter production report for the three months to the end of March. The Anglo-Swiss company reported lower production of copper, zinc, lead, coal and oil, all due to planned cuts announced last year. Full-year production guidance remains unchanged, except for exploration and production of oil, which came in 300,000 barrels lower than previous guidance.
The medium-term outlook for Glencore looks promising, with analysts expecting earnings to remain broadly flat this year at around £514m, followed by an impressive 79% rise to £920m for 2017. But this growth comes at a price, with the shares trading on 41 times forecast earnings for this year, falling to 23 times for the year ending December 2017.
In my opinion future growth is already priced-in, and the shares could experience a significant fall if next year's results fall short of the ambitious forecasts.
Supermarket in decline
Also reporting yesterday was the UK's second-largest supermarket Sainsbury's as it announced its annual results for the year to the end of March 2016. The supermarket chain reported a pre-tax profit of £548m compared to a £72m loss a year earlier, with group sales slightly lower at £23.5bn, compared to £23.8bn for fiscal 2015. Significantly, management has decided to cut the full year dividend from 13.2p per share to 12.1p.
The supermarket has struggled in recent years, with earnings in decline, and dividends being cut. Our friends in the City are expecting this to continue with market consensus predicting a 13% fall in underlying profits to £405m for the year to March 2017, with a further 2% decline to £398m pencilled-in for next year.
At current levels Sainsbury's shares look fully valued, trading on around 13 times forecast earnings for the next couple of years. Dividends are no more than average at around 3.5% for this year and next. Investors might want to stay on the sidelines until earnings stabilise and growth starts to appear on the horizon.
The verdict
Glencore shares have gained 45% in the last three months and are now beginning to look overvalued. Investors who are still keen on Glencore should probably wait for the next dip or pull-back in the share price to gain a more favourable valuation and entry point.
Sainsbury's shares look full valued at the moment, and I don't see much potential for capital growth given the expected decline in earnings. Dividends are no more than average at just over 3%, and better yields can be found elsewhere in the FTSE 100 for investors looking for income.
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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
