With the shares of the 10 largest ASX-listed companies underperforming the broader market by 10% over the last 12 months, the blue-chips should be fertile ground for a contrarian manager such as ourselves. Unfortunately, we can’t get excited about any of them.
Most of the top 10 are ‘old world’ businesses with poor growth prospects.
Since the Global Financial Crisis ended in 2009, the big four banks have consistently benefited from falling bad debt provisions. This has now reached levels where at best it can go on no longer and at worst could deteriorate meaningfully. Regulatory requirements for higher shareholders’ equity won’t help.
With the resources boom over and long term over capacity in key commodity markets, BHP(ASX:BHP) is unlikely to ever earn the oversized profits it has achieved over the last decade.Telstra (ASX:TLS) has a $2-3 billion earnings hole to plug once NBN payments dry up in five years. And with Aldi now a force to be reckoned with in the supermarket sector, sales growth and margins will be under continuing pressure at Woolworths (ASX:WOW) and Wesfarmers (ASX:WES).
Macquarie (ASX:MQG) and CSL (ASX:CSL) round out the top 10 and both have better prospects than the companies above. But Macquarie’s transformation from investment bank to a diversified asset manager (and associated share price re-rating) is now behind it. And while CSL’s future has few dark clouds on the horizon, don’t expect the Australian dollar to drive earnings to the extent it has in recent years.
Notwithstanding all of these challenges, value appears scarce. Despite anaemic growth and uncertainty over future capital requirements the big four banks and Macquarie all trade at more than 10 times earnings. Looking at the banks on a price to book value doesn’t make them appear any more attractive, with the Commonwealth Bank (ASX:CBA) and Westpac (ASX:WBC) trading at more than two times and the others around one and a half. BHP’s price to book value is similar to the banks at 1.6 times while its PE ratio is almost 40 times (albeit on depressed earnings).
The three industrial stocks, Telstra, Woolworths and Wesfarmers, also appear expensive. The first two are valued at more than 15.5 times next year’s earnings for which investors can expect anaemic profit growth over the next three years, while Wesfarmers trades on 17 times for only modestly higher growth expectations. CSL trades on 24 times earnings, which appears a tad pricey for a company that is expected to grow profits at less than 10% per annum for the next three years.
Being value investors, we are not afraid of a low growth stock, but the combination of low growth and high multiples is an ugly one.
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