Stocks that can be nosebleed expensive.
The most expensive stocks on Wall Street are not just limited to wallet-breaking share of companies like Berkshire Hathaway (ticker: BRK.A, BRK.B), which boasts Class A shares at more than $300,000 each. But another, more accurate way to look at Wall Street's most expensive stocks is to see which ones are overvalued relative to the earnings they return to shareholders. The best way to do that is by looking at the forward price-earnings ratio, known as the forward P/E, to gauge whether a company's stock is too pricey. A stock's forward P/E is based on the company's next projected 12 months of earnings. "Forward P/E uses earnings estimates, which are only as good as the person providing the estimate," says Stuart Michelson, a finance professor at Stetson University. Here are seven expensive stocks with overblown forward P/E ratios.
Chipotle Mexican Grill (CMG)
Chipotle, the fast casual restaurant chain, has performed well recently. During its second quarter, the company's same store sales rose by 10% and its restaurant margin gains rose to 20.9% from 19.7% a year earlier. While the company is recovering from a series of food safety incidents, Chipotle's recovery is "unlikely to share the same pace that other restaurants in similar situations faced in the past," says R.J. Hottovy, a Morningstar sector strategist in a July research note. Chipotle reported earnings per share of $3.99 compared to analyst predictions of $3.76. Revenue rose to $1.43 billion, higher than expectations of $1.41 billion. The company has a last 12 months P/E ratio of 94.3 and a forward P/E ratio of 48.7.
Behemoth online retailer and cloud service provider Amazon reported its annual earnings per share growth rose exponentially from $6.15 in 2017 to $20.14 in 2018. CFRA analyst Tuna Amobi estimates Amazon will increase its EPS by 33.6% in 2019 and another 41.9% in 2020, while revenue growth will decline from 31% in 2018 to an estimated 18% in 2019. CFRA has a "buy" rating and a $2,200 price target. Forward P/E sometimes is a more accurate look at the future valuation but most CEOs walk down or lower their estimates, says Derek Horstmeyer, an assistant finance professor at George Mason University. AMZN has a P/E ratio of 76.3 and a forward P/E ratio of 55.
Procter & Gamble (PG)
Procter & Gamble makes about 65 consumer brands and its organic sales rose during the past four quarters in fiscal 2019 -- around 20 of its brands generate $1 billion to $10 billion in sales annually while 11 other brands produce $500 million to $1 billion in annual sales. Morningstar says the stock is overvalued at a 20% premium. The company has a P/E ratio of 85.8 and a forward P/E ratio of 25.3. A P/E of 85 means you will pay $85 for every dollar of earnings for that company. "When you buy a stock, you want to spend the least for a dollar of earnings," says Gary Lemon, a professor of economics and management at DePauw University. "A company that has an excellent earnings forecast will have a higher P/E ratio."
Salesforce, the cloud applications company, has been growing with its two most recent acquisitions. The company acquired Tableau Software for $15.3 billion and MuleSoft for $6.5 billion. During the second quarter, Salesforce reported revenue of $4 billion, a 22% increase from the prior year at 66 cents per share. The spending spree adds revenue. Chief financial officer Mark Hawkins said in an earnings call that Tableau is estimated to increase revenue from $550 to $600 million, with about $200 to $300 million from the purchase of Salesforce.org in 2019 and $25 million from ClickSoftware, which was acquired for $1.35 billion in August. Salesforce said the total revenue forecast is between $16.75 billion and $16.9 billion. The company has a P/E ratio of 123.2, with a forward P/E ratio of 48.
The leading movie streaming company, Netflix remains in demand among consumers but is facing some headwinds. Some of the company's content is headed to its competitors while newer streaming services are adding more movies and shows to its lineup. Whether customers keep Netflix and add the newer streaming services or drop it remains to be seen. Over the past 10 years, Netflix's stock has increased by fiftyfold since there were few competitors other than cable. The company reported second quarter earnings per share of 60 cents and revenue of $4.92 billion. Netflix lost 126,000 U.S. subscribers instead of adding about 300,000 and only added 2.83 million international subscribers compared to estimates of 4.81 million that analysts had predicted. The company has a P/E ratio of 115.4 and a forward P/E ratio of 51.3.
Advanced Micro Devices (AMD)
Advanced Micro Devices, the chipmaker, reported second quarter earnings of 8 cents per share and revenue of $1.53 billion. The company's revenue dipped by 13% compared to the same quarter last year but rose 20% from the previous quarter. The lower sales came from its graphics channels sales. Lisa Su, AMD's president and CEO, told CNBC that the Chinese trade tariff dispute remains fluid. Credit Suisse analyst John Pitzer has a "hold" rating and a price target of $30 target. AMD's earnings were "balanced, but share valuation is more fair than cheap," he says. Northland Securities analyst Gus Richard has a "buy" rating and a price target of $36 and says its product lineup is strong and will rebound in 2020. The company has a P/E ratio of 167.5 and a forward P/E ratio of 28.6.
FedEx Corp. (FDX)
International shipper FedEx reported fiscal fourth quarter fiscal net income of $1.32 billion, or $5.01 a share, from revenue of $17.8 billion. The company's operating income was impacted by lower revenue from FedEx International Priority package and FedEx Express and higher costs at FedEx Ground. Barclays analyst Brandon Oglenski wrote in a report that the FDX has a "history of low profitability, modest financial returns and high capital investment; something needs to change," with cost reduction as the top priority. Barclays has a price target of $185 and a "neutral" rating. The company has a P/E ratio of 81 and a forward P/E ratio of 11.2. Management can revise its earnings estimates, impacting the forward P/E, Michelson says. "Some companies prefer to issue guidance so that they can more easily beat their own earnings estimates," he says.
Expensive stocks to buy:
-- Chipotle Mexican Grill (CMG)
-- Amazon.com (AMZN)
-- Procter & Gamble (PG)
-- Salesforce.com (CRM)
-- Netflix (NFLX)
-- Advanced Micro Devices (AMD)
-- FedEx (FDX)
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