(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GOOGL and NFLX.)
McDonald's Corp. (MCD) stock continues to have a fantastic 2017, defying skeptics with a stunning 43 percent spike this year. Interestingly, McDonald's shares have performed almost as well as many of the FANG stocks. (See also: Why Is McDonald's Valued Like a Big Tech Stock?)
It isn't just that McDonald's carries a high multiple, at 23 times 2019 earnings estimates. Coca-Cola Co. (KO) does that also, trading at a valuation of almost 22 times estimates, nearly on par with McDonald's. Coke and McDonalds are two companies with slow earnings growth and no revenue growth, while Facebook Inc. (FB) and the FANG stocks are perceived as high-flying, overvalued companies.
If something seems wrong in the equation, it is likely because McDonald's is rising on a story of a business that is changing. Jefferies analyst Andy Barish just upped his price target on McDonald's to $200 from $150, noting that McDonald's re-franchising transformation and use of technology could push for multiple expansion.
At $200, a rise of nearly 15 percent from its current price of $173 means McDonald's would trade at over 26 times 2019 earnings estimates of $7.58. At 26 times 2019 estimates, Facebook would rise 20 percent to nearly $210. Facebook currently trades at $173, which is 21.6 times 2019 estimates.
Growth Vs. No Growth
Wall Street is forecasting McDonald's to have declining sales through 2019 while offering investors an earnings growth rate of only 8 percent for 2019. In contrast, Facebook is expected to have accelerating revenue growth and earnings growth of 21 percent in 2019.
If investors are flocking to shares of McDonald's for the growth prospects due to the streamlining of its business and optimization of technology, then a company like Facebook that's growing at a higher rate should surely carry a higher valuation than McDonald's. Adjusted for growth, McDonald's trades at a one-year forward PEG ratio of 2.75, while Facebook trades at 1.
McDonald's trades at a valuation nearly 3 times more expensive than Facebook. A PEG ratio of 2.7 for Facebook would boost the stock's forward PE to almost 58, and rise by nearly 170 to $465. Every member of FANG trades at a one-year forward PEG ratio of less than 1.5.
(Data provided by YCharts)
Either the market is giving investors a grand opportunity in the FANG stocks, or McDonald's and Coke are two stocks that are overvalued.
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.