Why McDonald’s (MCD) and Wal-Mart are the Most Expensive Dow Components?

McDonald’s (MCD) and Wal-Mart (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 the price to earnings (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 judgement 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. McDonalds 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 2 times earnings.

Technical Analysis

MCD

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’s 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. (HD)

Stock PE Price/Sales Div Yield (Trailing Annual) Volatility
MMM 19.95 2.8 1.9% 0.11
T 25.94 1.5 5.1% 0.15
BA 24.17 1.2 1.4% 0.22
CAT 15.96 0.9 2.7% 0.19
CVX 9.82 1.1 3.2% 0.12
CSCO 11.71 2.4 3% 0.31
DD 12.14 1.6 2.9% 0.16
XOM 12.44 1 2.6% 0.12
GE 20.45 1.9 2.8% 0.18
GS 9.96 2.2 1.2% 0.2
HD 23.69 1.5 1.8% 0.16
INTC 13.26 2.3 3.7% 0.16
IBM 12.69 2 2% 0.22
JNJ 21.05 3.8 2.7% 0.12
JPM 12.36 2.1 2.5% 0.23
MCD 17.49 3.4 3.2% 0.1
MRK 32.31 3.2 3.6% 0.14
MSFT 14.17 3.9 1.8% 0.23
NKE 26.74 2.7 1.1% 0.19
PFE 8.89 3.7 3% 0.14
PG 21.56 2.7 2.8% 0.14
KO 20.85 3.8 2.7% 0.13
TRV 11.35 1.2 2.2% 0.13
UTX 15.69 1.6 2% 0.16
UNH 13.59 0.6 1.4% 0.23
VZ 65.51 1.2 4.1% 0.17
V 26.61 10.9 0.7% 0.22
WMT 15.23 0.5 2.3% 0.13
DIS 20.71 2.8 1.1% 0.19
Stock EPS Qtr. On Qtr. Growth Rev Qtr. On Qtr. Growth
MMM 7.9%   10/2013
3%   7/2013
1.3%   4/2013
4.8%   1/2013
5.6%   10/2013
2.9%   7/2013
2%   4/2013
4.2%   1/2013
T 14.3%   10/2013
7.6%   7/2013
11.7%   4/2013
N/A   1/2013
2.2%   10/2013
1.6%   7/2013
-1.4%   4/2013
0.2%   1/2013
BA 11.9%   10/2013
11%   7/2013
18%   4/2013
-30.9%   1/2013
10.6%   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%   1/2013
0.8%   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%   2/2013
1.7%   11/2013
6.2%   8/2013
5.4%   5/2013
4.9%   2/2013
DD N/A   10/2013
-9.8%   7/2013
126.6%   4/2013
-66.7%   1/2013
6.4%   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
GS 1.1%   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
HD 22.8%   8/2013
22.1%   5/2013
35.8%   2/2013
5%   11/2012
9.5%   8/2013
7.4%   5/2013
14%   2/2013
4.6%   11/2012
INTC 0%   10/2013
-27.8%   7/2013
-24.5%   4/2013
-24.4%   1/2013
0.1%   10/2013
-5.1%   7/2013
-2.6%   4/2013
-3%   1/2013
IBM 10.5%   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%   1/2013
3.1%   10/2013
8.5%   7/2013
8.4%   4/2013
8%   1/2013
JPM N/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
MCD 6.3%   10/2013
4.5%   7/2013
2.4%   4/2013
3.8%   1/2013
2.4%   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
MSFT 17%   10/2013
N/A   7/2013
20%   4/2013
-2.6%   1/2013
15.7%   10/2013
10.2%   7/2013
17.7%   4/2013
2.8%   1/2013
NKE 41%   9/2013
24.5%   6/2013
58.3%   3/2013
-16%   12/2012
7.7%   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
PG 8.3%   10/2013
-48.5%   8/2013
7.3%   4/2013
143.9%   1/2013
2.2%   10/2013
2.2%   8/2013
2%   4/2013
2%   1/2013
KO 8%   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
TRV 4.1%   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
UTX 0.6%   10/2013
16.3%   7/2013
286.1%   4/2013
53.5%   1/2013
2.8%   10/2013
15.9%   7/2013
15.9%   4/2013
14.3%   1/2013
UNH 2%   10/2013
10.2%   7/2013
-11.5%   4/2013
2.6%   1/2013
12.2%   10/2013
11.6%   7/2013
11.2%   4/2013
11%   1/2013
VZ 39.3%   10/2013
21.9%   7/2013
15.3%   4/2013
N/A   1/2013
4.4%   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%   2/2013
8.9%   10/2013
17%   7/2013
14.7%   5/2013
11.7%   2/2013
WMT 5.6%   11/2013
5.1%   8/2013
4.6%   5/2013
11.1%   2/2013
1.5%   11/2013
2.3%   8/2013
1%   5/2013
3.9%   2/2013
DIS 12.5%   11/2013
0%   8/2013
31.7%   5/2013
-3.7%   2/2013
7.3%   11/2013
4.4%   8/2013
9.6%   5/2013
5.2%   2/2013

 

+

Stock Current Qtr
EPS Growth
Forecast
Next Qtr
EPS Growth
Forecast
Current Qtr
Rev Growth
Forecast
Next Qtr
Rev Growth
Forecast
MMM 17.5% ( 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 )
T N/A
N/A
N/A
7.5% ( High )
3% ( Ave. )
-7.5% ( Low )
2.9% ( High )
1.5% ( Ave. )
-1.3% ( Low )
4.3% ( High )
2.5% ( Ave. )
-0.3% ( Low )
BA 32.8% ( 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 )
CAT 33.5% ( 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 )
DD 336.7% ( 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 )
XOM 5.4% ( 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 )
GE 41.2% ( 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 )
HD 50.8% ( 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 )
INTC 13.6% ( 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 )
IBM 19.4% ( 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 )
JNJ 34.8% ( 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 )
JPM 4.8% ( 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 )
MCD 3.5% ( 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 )
MRK 208.3% ( 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 )
MSFT 5.3% ( 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 )
NKE 50% ( 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 )
KO 17.2% ( 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 )
TRV 203.7% ( 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 )
UNH 24.2% ( 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 )
VZ N/A
N/A
N/A
58.8% ( High )
32.4% ( Ave. )
11.8% ( Low )
4.5% ( High )
3.3% ( Ave. )
2.2% ( Low )
5.5% ( High )
4.7% ( Ave. )
4% ( Low )
V 16.6% ( 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 )
WMT 1.8% ( 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 )
DIS 26% ( 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 )