LONDON -- I think investors should shift out of CRH (LSE:CRH) owing to its seriously lofty valuation. I expect earnings growth to remain under pressure for some time due to a patchy outlook for the American and European building markets, and prospective dividends could come under heavy fire as a result.
Broker Liberum Capital last week affirmed a 1,150 pence price target for CRH's stock, a rating that is down almost 20% from current levels.
Market weakness continues to increase
CRH, which supplies and distributes building materials globally, warned in its November interims that organic sales growth in North America had shrunk substantially during the third quarter. The firm also admitted the rate of decline had also accelerated in Europe.
It all meant sales were 3% lower than the corresponding period of 2011.
The company now expects earnings before interest, taxes, depreciation and amortization to dip to 1.6 billion euro in 2012 from the 1.65 billion euro achieved the previous year. The results for 2012 are scheduled for release tomorrow.
Although CRH continues to build its exposure to emerging markets such as India, China, and Eastern Europe, these operations are not currently meaty enough to offset the ongoing difficulties reported within its key Western markets.
Premium price built on shaky foundations
City analysts expect earnings per share (EPS) to nosedive 62% in 2012 to $0.73. EPS for 2013 is put at $0.85, a 16% bounce-back, and experts predict a further 32% gain in 2014 to $1.12.
Meanwhile, a forecast P/E ratio of 18.8 and 14.2, respectively, for 2013 and 2014 -- although down from 21.7 last year -- remains too elevated, in my opinion, given the huge earnings risk.
You see, I believe that subdued industry conditions should continue to depress CRH's performance over the medium-to-long term and put even these modest numbers under pressure.
Perilous payout potential
CRH does at least offer investors a dividend yield north of the FTSE 100 average of 3.5%. A reading of 3.9% is anticipated by City analysts at present, although this figure is down from the 4.3% yield available last year. A yield of 3.9% and 4%, respectively, are estimated for this year and the next.
But in my opinion, further earnings collapses could, once again, place future dividends in jeopardy. Indeed, the payout is covered only 1.3 and 1.7 times for 2013 and 2014, respectively. A figure under 2 is usually categorized as particularly risky.
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Fool contributor Royston Wild has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.