Which of these Three Companies is the Cheapest?
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
No one really knows where this market is going. It continues to trend upwards, but downside risks such as China and the specter of Fed tapering continue to overshadow gains.
Still, although it is impossible to predict the direction of the market, it is easier to forecast the direction of individual stocks. And there are plenty of companies in the market that are currently trading on metrics that suggest that they could still be undervalued. That said, there are even more companies that trade on ratios that suggest they are overvalued.
This giant is totally undeserving of its valuation
Undervalued compared to its best-in-class status is Pfizer (NYSE: PFE). On a historical basis, Pfizer's five-year average for the trailing-12 months sits at 15.8, but the company is currently trading at a ratio of 15.1, which is 4% below its five-year average. Additionally, Pfizer's trailing-12 month P/E figure is 45% below the major drug manufactures sector average of 21.9 and its forward earnings multiple of 12.7 is below the sector average of 14.4. The company also achieves one of the best operating margins in the sector of 34.5%, compared to the sector average of 28%.
Moreover, Pfizer recently announced a continuation of its multi-billion dollar share- repurchase program, which when completed should return an equivalent amount of around 17% per share to investors. Pfizer is a world leader in its field currently trading at one of the lowest valuation in its sector.
This company has had a good run
Secondly, Nike (NYSE: NKE), which has been in demand for the past few years as the company's sales have been relatively stable in a tough economic environment. That said, now the company looks slightly expensive compared to its peers.
Indeed, in comparison to its own five-year average earnings multiple, the company is trading at a 14% premium (five-year average P/E stands at 23.5 while the company currently trades at a trailing-12 month P/E of 26.8). Moreover, compared to the rest of the footwear-apparel sector, Nike appears expensive; the rest of the sector trades at a trailing-12 month P/E of 22.8.
Nike also trades at a 10% premium to the rest of the sector on a price-to-sales basis and works with a operating margin 35% lower than the rest of the industry. Nike has outperformed the S&P 500 by 3.8% so far this year and although the company is still growing its earnings during a period of relative stagnation, it could be time to hold that buy order for now.
Thirdly and last on this list is Coca-Cola (NYSE: KO), renowned worldwide and with one of the most valuable brands in the world, Coke, unfortunately, looks expensive right now. The company's five-year average trailing-12 P/E ratio stands at 18.3 although the company currently trades at a trailing-12 month P/E ratio of 21.7, indicating a 13% premium to its historic valuation.
Still, Coke deserves a slight premium to the rest of its sector but interestingly its peers all achieve a better return on equity than Coke.
Having said all of that, despite its high valuation relative to its historic numbers, Coke has still under-performed the S&P 500 by 6.2% so far this year. In comparison to the rest of the beverages sector, Coke looks slightly undervalued. The sector average trailing-12 month P/E stands at 23.8 and the forward sector P/E stands at 19.1, compared to Coke's valuation of 21.7 and 17.9, respectively. Although, Coke does trade at a slightly higher price-to-sales ratio than the rest of the sector - Coke's price-to-sales ratio stands at 3.8 while the sector average is 3.2.
All in all, Coke looks cheap compared to the rest of its sector on some multiples but expensive on others. However, on the key metric, a comparison to its own historic valuation, Coke looks expensive so based on that, for the time being at least, I would stay away.
Overall it is difficult to know where this market is going but buying shares in companies that are undervalued when compared to their historic averages is a surefire way to make money. Pfizer in particular is a good bet as the company is the worlds leading pharmaceutical company and the stock buyback should really boost investor returns.
On the other hand, both Coke and Nike have had good runs so far this year and are now left looking overvalued, so perhaps it is time to avoid them for now.
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Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!