(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of AAPL and GOOGL.)
McDonald's Corp. (MCD ), Yum! Brands, Inc. (YUM), and The Coca-Cola Co. (KO ) all have one thing in common: Analysts are forecasting revenues to fall this year. Not only that, but they all trade at a one-year forward price/earnings (P/E) multiple that is higher than the S&P 500's, in a range of 18.5 to 21.8 times earnings, versus the S&P 500 multiple of about 15.6. That makes all of these stocks not only overvalued compared to the broader market but even more expensive than tech giants such as Apple Inc. (AAPL), Alphabet Inc. (GOOGL), and Facebook Inc. (FB). Thus, the high valuations of McDonald's, Yum and Coca-Cola makes them vulnerable to steep declines at slightest disappointment for investors.
Coca-Cola, McDonald's, and Yum are expected to see revenue in 2018 decline by about 6% to 9%, with minimal to no revenue growth over the next two years. But over the past year, McDonald's shares have risen by nearly 21%, while Yum has climbed over 14.5% when compared to the S&P 500's return of 11.4%. Only Coca-Cola shares are lower, down by about 4.5%.
Yum Is the Most Expensive
Yum is the most expensive of the three consumer stocks and is forecast to see its revenue fall by 5.8% to $5.537 billion in 2018, while declining again in 2019 by another 1.5% to $5.451 billion. Shares trade at a hefty forward earnings multiple of 21.8 times 2019 earnings estimates of $3.83 per shares. Revenue has fallen steadily since 2016, from $6.366 billion, a drop of 13.5%.
Yum shares trade at an even higher valuation than McDonald's, which is trading at 20 times 2019 earnings of $8.27 per share. Like Yum, McDonald's revenue is falling as well, but at an even faster pace. McDonald's revenue is forecast to decline by 7% in 2018 to $21.2 billion and then drop even more in the year 2019 to $21.1 billion. Revenue for McDonald's in 2016 was nearly 14% higher at $24.6 billion.
McDonald's shares trade at a higher valuation than Coca-Cola's, which currently sells at around 18.5 times 2019 earnings estimates of $2.27 per share. Coca-Cola is expected to see its revenue drop by over 9.5% in 2018 to $32.04 billion, before slightly rebounding by 3.6% to $33.21 billion. Coke's revenue has fallen an astounding 23% since 2016 from $41.85 billion.
It seems somewhat unusual that the market is valuing these three companies at a higher multiple than companies with blistering revenue and earnings growth rates that trade at nearly the same earnings multiple or cheaper. Facebook's revenue is seen rising by 39.25% in 2018, Alphabet is growing at 22.3%, and Apple at nearly 13.9%. The giant technology stocks trade between 14 and 22 times one-year forward earnings.
The market seems to be sending a clear message: Either consumer stocks are massively overvalued, or the technology giants are incredibly cheap.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.