Nobody likes paying over the odds, especially when buying company stocks. The following three are of the most overvalued shares on the FTSE 100, at least according to their current price/earnings ratio. But is there a better story behind that headline figure?
Tesco
Here’s a surprise – recovering grocery giant Tesco (LSE: TSCO) is currently trading at a whopping 63.4 times earnings. This follows four years of tumbling revenues and negative earnings per share (EPS) growth. EPS crashed from 40.31p in February 2012 to just 3.42p at the start of this year. Over the same period, Tesco’s P/E ratio has soared from from a cheap-looking 7.9 times to today’s crazy number.
Clearly all is not lost, with Tesco’s share price up 40% over the past 12 months. Its future is now a lot brighter as management works to slash overheads and tempt back lost shoppers. Its valuation is forecast to fall to 28.1 times earnings next year, and 21.6 times in 2018. That starts to look a bit more sensible if not exactly cheap, given the challenges it still faces in a tough grocery market. With rising inflation set to squeeze shoppers’ pockets and Tesco’s margins, boss Dave Lewis could struggle to make further headway. Rampantly overvalued? No longer. But still a little pricey for my liking.
Vodafone
Mobile phone giant Vodafone (LSE: VOD) hardly looks a great call at today’s valuation of 39.4 times earnings. The share price is trading 14% lower than three years ago. Three out of the last four years seeing negative pre-tax profit is the obvious culprit as growth slows and Vodafone bears the £20bn burden of its Project Spring revamp. However, that’s now mostly complete and the rewards are set to blossom.
Vodafone’s earnings are now on an upwards trajectory, with a record rise of 18% this year and a further 23% forecast in 2016. Better still, while Tesco pays no dividend right now, Vodafone yields 6.5%. Today’s toppy valuation also looks set to retreat, if slowly, to 31.68 next year, to 25.8 in 2017 and to 20.52 in 2018. At today’s low price of 197p, this could make a nice long-term recovery play for income seekers.
Randgold Resources
All that glisters is not gold, especially when it comes with a dazzlingly high valuation. Gold miner Randgold Resources (LSE: RRS) currently trades at 36.7 times earnings, which takes some of the shine off this play on gold. The share price is up 45% in the last year, although at today’s price of 5,990p, it’s well below its 52-week high of 9,820p.
The share price appears to have peaked for now, falling 22% in the last three months. Randgold’s forecast valuation looks more tempting at 19.61 times earnings. But I would say this is a dangerous time to play the gold price, as investors bullishly anticipate a Santa rally and Trump reflationary madness in 2017. Gold is said to be a good hedge against inflation but I reckon stock markets, and dividend stocks in particular, will be the place to be next year. For me, Vodafone’s dividend makes it the winner of these three stocks.
