3 ASX shares that could see earnings slide next year

I’m sure most readers will be very familiar with the earnings gap that Telstra Corporation Ltd (ASX: TLS) faces when the NBN rollout completes.

But it isn’t the only company on the Australian share market that has a potential earnings gap to contend with on the horizon.

Three others are listed below. Here’s why I think investors should consider avoiding them:

Metcash Limited (ASX: MTS)

This wholesale distributor looks likely to lose a major contract in 2019. At the end of last month Drakes South Australia told the company that it would not be making a commitment to have its supermarkets supplied from its proposed new distribution centre. Drakes South Australia’s current supply contract is expected to contribute approximately $270 million in total sales (including tobacco) to Metcash in FY 2018. Although at this stage Drakes Queensland has not advised of a plan to go it alone, I am concerned that it could follow in the footsteps of its South Australian equivalent in the near future.

Monash IVF Group Ltd (ASX: MVF)

As well as being hit by the arrival of a low-cost operator in the fertility treatment market, last year Monash IVF lost one of its key doctors. Dr Lynn Burmeister parted ways with Monash IVF in September 2017 and agreed to not practice within 50km of Monash IVF’s clinics in Hawthorn, Richmond and/or Clayton for a 12-month period. That agreement comes to an end in two months and could put pressure on Monash IVF. In fact, previously management had warned that her departure could have a material impact on its results. It stated that: “the impact of Dr Burmeister’s cessation should not be material in FY18. In FY19, there is potential for a percentage decline in Net Profit After Tax (NPAT) of up to high single digits…” I would suggest that investors stay clear of Monash IVF for the meantime, despite how cheap it looks on paper.

Sigma Healthcare Ltd (ASX: SIG)

Like Metcash, Sigma Healthcare could lose a major supply contract next year. Last year the company took My Chemist/Chemist Warehouse (MC/CW) to court after it sought to source products from an alternative supplier. While the matter was ultimately resolved, I suspect that MC/CW will not be renewing its contact when it ends in June 2019. At the time of the announcement, analysts at Citi estimated that the loss of the contract could result in a 33% drop in sales in the second-half of FY 2020 for Sigma. I struggle to see how the company would be able to offset such a large decline and plan to keep away from its shares until everything is known.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Monash IVF Group Ltd. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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