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  • Why McDonald's And Wal-Mart Are The Most Over-valued Dow Components 0 comments
    Nov 20, 2013 2:04 PM | about stocks: MCD, WMT

    McDonald's (NYSE:MCD) and Wal-Mart (NYSE:WMT) are the most expensive stocks on the Dow Jones Industrial Average. Though the PE ratios are not outrageous at 17 and 15 respectively, you are paying a lot of money for very little growth. The tables at the bottom of this article have everything you need to see just how overvalued these companies are relative to their Dow Jones peers.

    What makes a stock cheap versus expensive?

    The price to earnings ratio or price-to-sales are often good starting points, but they only tell a small part of the story. Stocks are priced on growth, expectations for future growth, and changes in said expectations. Thus, you have to look at how much you are paying for that growth - buy growth at a cheap price and good things are much more likely to happen. The metric I like to look at is the price to earnings (NYSE:PE) multiple divided by the earnings growth rate. Companies growing faster should be more expensive. If a stock has an EPS growth rate of 10% and it trades with a PE of 10, then you are paying 1 times the growth rate ( 10 / 10 = 1 ), while a stock growing at 10% and trading with a PE of 20 is expensive (20/10 = 2) at 2 times the growth rate. The most one ought to pay for a stock is 2 times its growth rate, and that is only if you anticipate really strong growth or a favorable improvement in the growth picture. Stocks trading at 1 times growth are much more desirable and are not hard to find. Calculating growth is not straight forward.

    I look at the past year's quarter on quarter growth rates as well as analysts' growth outlook for the next couple of quarters, factor in any dividends, and choose a growth rate that best captures the company's rate of growth. This is a judgment call, but it is anchored in reality and data. I give McDonald's a growth rate of 6% (with the dividend) and Wal-Mart comes in at 7%. To be sure, you have to account for the variance in estimates and quarter to quarter variance in EPS growth, when examining the entire list of Dow Components, but these stocks in particular are quite stable. McDonald's has a PE of 17 (I round, by the way). The result is that MCD is trading at 2.4 times the growth rate, making it expensive. Wal-Mart, similarly, is above the 2 times earnings threshold.

    Technical Analysis

    (click to enlarge) MCD has formed a channel and appears range-bound. I look for this to continue for some time into the future as time lets MCD earnings catch up to its price. If you are in MCD and are looking to get out, now might be a good time as it is near the upper part of the range.

    Conclusion

    These stocks have very little potential in the way of price appreciation in the near term. They are not going to grow significantly any time soon, particularly as these companies are so large, and it is hard to imagine investors willing to pay much more than they are already for what is fairly anemic, albeit consistent, growth. The major caveat ( as always ) is that general market sentiment will trump all other considerations, so these stocks could just ride the current market bull along with every other stock - just beware when the bull tires - over-valued, expensive stocks get hit the hardest at that point. Below, I've laid out all of the growth data you need to draw your own conclusions. Note, Earnings are approaching rapidly for: Home Depot. (NYSE:HD)

    StockPEPrice/SalesDiv. Yield (Trailing Annual)Volatility
    MMM19.952.81.9%0.11
    T25.941.55.1%0.15
    BA24.171.21.4%0.22
    CAT15.960.92.7%0.19
    CVX9.821.13.2%0.12
    CSCO11.712.43%0.31
    DD12.141.62.9%0.16
    XOM12.4412.6%0.12
    GE20.451.92.8%0.18
    GS9.962.21.2%0.2
    HD23.691.51.8%0.16
    INTC13.262.33.7%0.16
    IBM12.6922%0.22
    JNJ21.053.82.7%0.12
    JPM12.362.12.5%0.23
    MCD17.493.43.2%0.1
    MRK32.313.23.6%0.14
    MSFT14.173.91.8%0.23
    NKE26.742.71.1%0.19
    PFE8.893.73%0.14
    PG21.562.72.8%0.14
    KO20.853.82.7%0.13
    TRV11.351.22.2%0.13
    UTX15.691.62%0.16
    UNH13.590.61.4%0.23
    VZ65.511.24.1%0.17
    V26.6110.90.7%0.22
    WMT15.230.52.3%0.13
    DIS20.712.81.1%0.19
    StockEPS Qtr. On Qtr. GrowthRev Qtr. On Qtr. Growth
    MMM7.9% 10/2013 3% 7/2013 1.3% 4/2013 4.8% 1/20135.6% 10/2013 2.9% 7/2013 2% 4/2013 4.2% 1/2013
    T14.3% 10/2013 7.6% 7/2013 11.7% 4/2013 N/A 1/20132.2% 10/2013 1.6% 7/2013 -1.4% 4/2013 0.2% 1/2013
    BA11.9% 10/2013 11% 7/2013 18% 4/2013 -30.9% 1/201310.6% 10/2013 9.1% 7/2013 -2.5% 4/2013 14% 1/2013
    CAT-42.9% 10/2013 -42.9% 7/2013 -44.7% 4/2013 -55.2% 1/2013-18.4% 10/2013 -15.8% 7/2013 -17.3% 4/2013 -6.7% 1/2013
    CVX-4.5% 10/2013 -24.3% 7/2013 -2.8% 4/2013 43.9% 1/20130.8% 10/2013 -8.4% 7/2013 -6.4% 4/2013 1% 1/2013
    CSCO-5.1% 11/2013 16.8% 8/2013 15% 5/2013 47.5% 2/20131.7% 11/2013 6.2% 8/2013 5.4% 5/2013 4.9% 2/2013
    DDN/A 10/2013 -9.8% 7/2013 126.6% 4/2013 -66.7% 1/20136.4% 10/2013 -2.1% 7/2013 3% 4/2013 -1.4% 1/2013
    XOM-14.4% 10/2013 -54.5% 8/2013 6% 4/2013 11.3% 2/2013-2.4% 10/2013 -16.4% 8/2013 -12.3% 4/2013 -4.4% 2/2013
    GE-6.1% 10/2013 3.4% 7/2013 17.2% 4/2013 8.7% 1/2013-1.5% 10/2013 -3.5% 7/2013 -0.2% 4/2013 4.4% 1/2013
    GS1.1% 10/2013 107.9% 7/2013 9.4% 4/2013 203.3% 1/2013-19.5% 10/2013 30% 7/2013 1.4% 4/2013 52.7% 1/2013
    HD22.8% 8/2013 22.1% 5/2013 35.8% 2/2013 5% 11/20129.5% 8/2013 7.4% 5/2013 14% 2/2013 4.6% 11/2012
    INTC0% 10/2013 -27.8% 7/2013 -24.5% 4/2013 -24.4% 1/20130.1% 10/2013 -5.1% 7/2013 -2.6% 4/2013 -3% 1/2013
    IBM10.5% 10/2013 -12.9% 7/2013 3.4% 4/2013 11.2% 1/2013-4.2% 10/2013 -3.3% 7/2013 -5.1% 4/2013 -0.6% 1/2013
    JNJ-1% 10/2013 166% 7/2013 -13.5% 4/2013 1050.3% 1/20133.1% 10/2013 8.5% 7/2013 8.4% 4/2013 8% 1/2013
    JPMN/A 10/2013 32.2% 7/2013 33.6% 4/2013 54.9% 1/2013-8.1% 10/2013 13.7% 7/2013 -3.6% 4/2013 10.2% 1/2013
    MCD6.3% 10/2013 4.5% 7/2013 2.4% 4/2013 3.8% 1/20132.4% 10/2013 2.4% 7/2013 0.9% 4/2013 1.9% 1/2013
    MRK-32.1% 10/2013 -48.3% 7/2013 -7.1% 5/2013 -40.1% 2/2013-4% 10/2013 -10.6% 7/2013 -9% 5/2013 -4.5% 2/2013
    MSFT17% 10/2013 N/A 7/2013 20% 4/2013 -2.6% 1/201315.7% 10/2013 10.2% 7/2013 17.7% 4/2013 2.8% 1/2013
    NKE41% 9/2013 24.5% 6/2013 58.3% 3/2013 -16% 12/20127.7% 9/2013 7.4% 6/2013 9.4% 3/2013 7.4% 12/2012
    PFE-9.3% 10/2013 360.5% 7/2013 58.3% 4/2013 358% 1/2013-2.4% 10/2013 -7.2% 7/2013 -9.3% 4/2013 12.9% 1/2013
    PG8.3% 10/2013 -48.5% 8/2013 7.3% 4/2013 143.9% 1/20132.2% 10/2013 2.2% 8/2013 2% 4/2013 2% 1/2013
    KO8% 10/2013 -3.3% 7/2013 -13.3% 4/2013 13.9% 2/2013-2.5% 10/2013 -2.5% 7/2013 -0.9% 4/2013 3.8% 2/2013
    TRV4.1% 10/2013 91.3% 7/2013 15.3% 4/2013 -48.2% 1/2013-0.9% 10/2013 5% 7/2013 -1% 4/2013 1.6% 1/2013
    UTX0.6% 10/2013 16.3% 7/2013 286.1% 4/2013 53.5% 1/20132.8% 10/2013 15.9% 7/2013 15.9% 4/2013 14.3% 1/2013
    UNH2% 10/2013 10.2% 7/2013 -11.5% 4/2013 2.6% 1/201312.2% 10/2013 11.6% 7/2013 11.2% 4/2013 11% 1/2013
    VZ39.3% 10/2013 21.9% 7/2013 15.3% 4/2013 N/A 1/20134.4% 10/2013 4.3% 7/2013 4.2% 4/2013 5.6% 1/2013
    V-25.5% 10/2013 N/A 7/2013 0.5% 5/2013 29.5% 2/20138.9% 10/2013 17% 7/2013 14.7% 5/2013 11.7% 2/2013
    WMT5.6% 11/2013 5.1% 8/2013 4.6% 5/2013 11.1% 2/20131.5% 11/2013 2.3% 8/2013 1% 5/2013 3.9% 2/2013
    DIS12.5% 11/2013 0% 8/2013 31.7% 5/2013 -3.7% 2/20137.3% 11/2013 4.4% 8/2013 9.6% 5/2013 5.2% 2/2013

    +

    StockCurrent Qtr EPS Growth ForecastNext Qtr EPS Growth ForecastCurrent Qtr Rev Growth ForecastNext Qtr Rev Growth Forecast
    MMM17.5% ( High ) 13.9% ( Ave. ) 9.7% ( Low )14.3% ( High ) 11.8% ( Ave. ) 9.9% ( Low )6.4% ( High ) 4.2% ( Ave. ) 1.4% ( Low )6% ( High ) 5.2% ( Ave. ) 4.7% ( Low )
    TN/A N/A N/A7.5% ( High ) 3% ( Ave. ) -7.5% ( Low )2.9% ( High ) 1.5% ( Ave. ) -1.3% ( Low )4.3% ( High ) 2.5% ( Ave. ) -0.3% ( Low )
    BA32.8% ( High ) 20.3% ( Ave. ) 9.5% ( Low )30.6% ( High ) 22.9% ( Ave. ) 18.1% ( Low )4.4% ( High ) 0.5% ( Ave. ) -4.3% ( Low )25.7% ( High ) 17.9% ( Ave. ) 10.4% ( Low )
    CAT33.5% ( High ) 23.9% ( Ave. ) 18.2% ( Low )12.2% ( High ) -4.6% ( Ave. ) -14.5% ( Low )-12.3% ( High ) -15.4% ( Ave. ) -20.8% ( Low )3.7% ( High ) -1% ( Ave. ) -6.4% ( Low )
    CVX-9.1% ( High ) -22% ( Ave. ) -31.9% ( Low )6% ( High ) -6.6% ( Ave. ) -17.9% ( Low )26.2% ( High ) 8.4% ( Ave. ) -6.5% ( Low )18.3% ( High ) 10.6% ( Ave. ) -9.3% ( Low )
    CSCO-20.3% ( High ) -22% ( Ave. ) -23.7% ( Low )8.7% ( High ) 4.3% ( Ave. ) -2.2% ( Low )-7.9% ( High ) -8.8% ( Ave. ) -10.1% ( Low )-2.5% ( High ) -7% ( Ave. ) -10.4% ( Low )
    DD336.7% ( High ) 314.2% ( Ave. ) 261.4% ( Low )-47.5% ( High ) -50.6% ( Ave. ) -52.8% ( Low )4.7% ( High ) 2.7% ( Ave. ) 0.1% ( Low )7.3% ( High ) 4.8% ( Ave. ) 1.2% ( Low )
    XOM5.4% ( High ) -10.1% ( Ave. ) -20.6% ( Low )4.7% ( High ) -6.6% ( Ave. ) -20.3% ( Low )3.9% ( High ) -5.1% ( Ave. ) -14% ( Low )9.1% ( High ) 0.5% ( Ave. ) -5.8% ( Low )
    GE41.2% ( High ) 38.6% ( Ave. ) 35.9% ( Low )8.8% ( High ) 2.9% ( Ave. ) -5.9% ( Low )5% ( High ) 1.4% ( Ave. ) -0.8% ( Low )1.5% ( High ) -0.6% ( Ave. ) -3.5% ( Low )
    GS-6% ( High ) -26% ( Ave. ) -51.4% ( Low )2.8% ( High ) -8.9% ( Ave. ) -23.8% ( Low )-11.1% ( High ) -17.7% ( Ave. ) -23.1% ( Low )-4.2% ( High ) -10.4% ( Ave. ) -20.2% ( Low )
    HD50.8% ( High ) 41.3% ( Ave. ) 36.5% ( Low )18.4% ( High ) 6.7% ( Ave. ) -2% ( Low )7.3% ( High ) 5.7% ( Ave. ) 3.9% ( Low )6.1% ( High ) -2.1% ( Ave. ) -4.9% ( Low )
    INTC13.6% ( High ) 7.4% ( Ave. ) 1.2% ( Low )27.5% ( High ) 7.5% ( Ave. ) -7.5% ( Low )4.6% ( High ) 1.8% ( Ave. ) 0.9% ( Low )6.4% ( High ) 2.1% ( Ave. ) -2.4% ( Low )
    IBM19.4% ( High ) 17.3% ( Ave. ) 12% ( Low )30% ( High ) 21.5% ( Ave. ) 12.2% ( Low )-0.9% ( High ) -3.7% ( Ave. ) -7.8% ( Low )1.2% ( High ) -0.4% ( Ave. ) -3% ( Low )
    JNJ34.8% ( High ) 32.6% ( Ave. ) 31.4% ( Low )25.4% ( High ) 21.3% ( Ave. ) 17.2% ( Low )3% ( High ) 2.1% ( Ave. ) 1.5% ( Low )4.5% ( High ) 3.4% ( Ave. ) 1% ( Low )
    JPM4.8% ( High ) -4.5% ( Ave. ) -26.8% ( Low )3.1% ( High ) -6.3% ( Ave. ) -20.8% ( Low )7.1% ( High ) 0.7% ( Ave. ) -3.6% ( Low )8.6% ( High ) 1.3% ( Ave. ) -3.3% ( Low )
    MCD3.5% ( High ) 1.4% ( Ave. ) -0.8% ( Low )7.1% ( High ) 3.2% ( Ave. ) -1.6% ( Low )6.7% ( High ) 2.6% ( Ave. ) -0.9% ( Low )5.8% ( High ) 3.9% ( Ave. ) 1.1% ( Low )
    MRK208.3% ( High ) 198.1% ( Ave. ) 174.4% ( Low )69.2% ( High ) 59.6% ( Ave. ) 50% ( Low )-0.9% ( High ) -2.6% ( Ave. ) -4.8% ( Low )0.6% ( High ) -1.2% ( Ave. ) -2.3% ( Low )
    MSFT5.3% ( High ) -9.2% ( Ave. ) -26.3% ( Low )0% ( High ) -8.3% ( Ave. ) -16.7% ( Low )13.2% ( High ) 10.3% ( Ave. ) 8.4% ( Low )4% ( High ) -0.2% ( Ave. ) -3.8% ( Low )
    NKE50% ( High ) 38.1% ( Ave. ) 26.2% ( Low )-11.6% ( High ) -17.9% ( Ave. ) -23.2% ( Low )11.2% ( High ) 8.1% ( Ave. ) 4.8% ( Low )11.7% ( High ) 8.8% ( Ave. ) 6.2% ( Low )
    PFE-35.7% ( High ) -38% ( Ave. ) -40.4% ( Low )55.3% ( High ) 50% ( Ave. ) 42.1% ( Low )-23.8% ( High ) -26.7% ( Ave. ) -28.9% ( Low )-10.7% ( High ) -12.1% ( Ave. ) -13.1% ( Low )
    PG-9.4% ( High ) -12.9% ( Ave. ) -17.3% ( Low )28.4% ( High ) 23.9% ( Ave. ) 20.5% ( Low )1.5% ( High ) 0.9% ( Ave. ) -0.2% ( Low )5% ( High ) 2.6% ( Ave. ) 1.6% ( Low )
    KO17.2% ( High ) 14.8% ( Ave. ) 7.4% ( Low )28.2% ( High ) 25.6% ( Ave. ) 20.5% ( Low )0.9% ( High ) -0.9% ( Ave. ) -2.5% ( Low )2.5% ( High ) 0.5% ( Ave. ) -1% ( Low )
    TRV203.7% ( High ) 168.3% ( Ave. ) 137.9% ( Low )3% ( High ) -7.3% ( Ave. ) -20.2% ( Low )-10.8% ( High ) -15.9% ( Ave. ) -16.9% ( Low )-5.8% ( High ) -9.3% ( Ave. ) -11.2% ( Low )
    UTX-30.5% ( High ) -32.7% ( Ave. ) -34% ( Low )9.4% ( High ) 5.8% ( Ave. ) 1.4% ( Low )6.3% ( High ) 4.4% ( Ave. ) 1.8% ( Low )7.5% ( High ) 4.7% ( Ave. ) 2.9% ( Low )
    UNH24.2% ( High ) 16.7% ( Ave. ) 11.7% ( Low )17.2% ( High ) 3.4% ( Ave. ) -16.4% ( Low )13.9% ( High ) 7.9% ( Ave. ) 5.8% ( Low )20.7% ( High ) 9.1% ( Ave. ) 3.7% ( Low )
    VZN/A N/A N/A58.8% ( High ) 32.4% ( Ave. ) 11.8% ( Low )4.5% ( High ) 3.3% ( Ave. ) 2.2% ( Low )5.5% ( High ) 4.7% ( Ave. ) 4% ( Low )
    V16.6% ( High ) 11.9% ( Ave. ) 3.6% ( Low )19.8% ( High ) 15.1% ( Ave. ) 12% ( Low )13.8% ( High ) 10% ( Ave. ) 7.9% ( Low )10.9% ( High ) 8.5% ( Ave. ) 6.8% ( Low )
    WMT1.8% ( High ) 0% ( Ave. ) -4.2% ( Low )14.9% ( High ) 11.4% ( Ave. ) 5.3% ( Low )6.7% ( High ) -2.3% ( Ave. ) -89.7% ( Low )5.1% ( High ) 3.9% ( Ave. ) 2.1% ( Low )
    DIS26% ( High ) 15.6% ( Ave. ) -1.3% ( Low )19.3% ( High ) 10.8% ( Ave. ) 2.4% ( Low )10.8% ( High ) 7.4% ( Ave. ) 4.4% ( Low )7.8% ( High ) 5.8% ( Ave. ) 3.1% ( Low )
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