The S&P 500 is hovering near all-time highs, so it isn't surprising that some well-known "big brand" stocks now appear overvalued. Today, we'll take a closer look at three "big brand" plays with frothy P/E ratios -- Coty (NYSE:COTY), Snyder's-Lance (NASDAQ: LNCE), and Mondelez (NASDAQ:MDLZ) -- and see if they're as wildly overvalued as they appear.
Coty owns a portfolio of 77 cosmetics, fragrances, and body care brands. It produces a wide variety of licensed brands for designers and celebrities, and its top brands include Calvin Klein, Chloe, Marc Jacobs, OPI, and Sally Hansen.
Last October, it acquired 44 of P&G's (NYSE:PG) beauty brands for $12.5 billion, which added big brands like Covergirl, Max Factor, Wella, and Clairol to its portfolio. That acquisition made Coty the third largest beauty company in the world -- with the largest fragrance business, second largest salon hair business, and third largest color cosmetics business.
However, those acquisition costs have weighed down Coty's bottom line over the past few quarters. Analysts expect Coty's revenue to rise 74% this year on the inclusion of P&G's brands, but earnings are expected to fall 33%. The acquisition has also inflated Coty's trailing P/E to 218 -- which is much higher than its industry average of 24. But once Coty finally digests those brands, Coty's revenue and earnings are expected to respectively rise 13% and 23% next year. Based on that forecast, Coty only trades at 17 times forward earnings -- so the stock isn't that pricey relative to its earnings growth potential.
Snyder's-Lance is the second largest maker of salty snacks in the United States. Its top brands include Snyder's of Hanover pretzels, Cape Cod Potato Chips, and Stella D'oro cookies and breadsticks. Last February, it acquired Diamond Foods for $1.3 billion, which added Diamond nuts, Pop Secret popcorn, and Kettle potato chips to its portfolio. It recently divested the Diamond nuts brand to focus more on its higher-growth brands.
The Diamond acquisition has greatly boosted Snyder's-Lance's growth over the past few quarters, and analysts expect its revenue and earnings to respectively rise 39% and 27% this year. However, the acquisition also inflated its trailing P/E ratio to 107 -- which is much higher than its industry average of 33. But looking ahead, analysts expect the company's revenue and earnings to respectively grow 4% and 20% next year. Based on those numbers, Snyder's Lance trades at a more reasonable 25 times forward earnings.
Mondelez owns a massive portfolio of sweet and salty snack brands, including Oreo, Chips Ahoy, Ritz, Nabisco, Toblerone, and Cadbury. However, the company's quarterly revenue has fallen year-over-year for ten straight quarters due to macro issues in certain countries, shifting consumer tastes, and currency headwinds.
Analysts expect Mondelez's revenue to fall 12% this year, but for its earnings to rise 11% on buybacks. Despite Mondelez's weak financial performance, the stock trades at 86 times earnings (compared to the industry average of 29) due to activist interest and takeover speculation.
Trian Fund Management's Nelson Peltz and Pershing Square's Bill Ackman are both pressuring the company to divest weaker brands, adopt new marketing strategies, acquire other companies, or sell itself. Mondelez attempted to acquire Hershey (NYSE:HSY) last year, but the chocolate maker rebuffed the offer. Shares of Mondelez then spiked in December on rumors that Kraft Heinz was interested in buying the company.
Looking ahead, analysts expect Mondelez to post flat revenue growth and 8% earnings growth next year. The stock trades at a fairly reasonable 21 times forward earnings, but its long-term growth prospects (excluding acquisitions or a buyout) still look dim.
Are these three stocks "wildly" overvalued?
Coty, Snyder's-Lance, and Mondelez will all rise to the top of any searches for "overvalued" consumer goods stocks with lofty P/E ratios. But investors should note that Coty and Snyder's-Lance's numbers were inflated by acquisitions, and that Mondelez's price was lifted by buyout buzz.
In these situations, it's important to look at forward multiples. Based on forward P/E ratios, none of these stocks looks terribly expensive. But if Coty's acquisition indigestion continues, Snyder-Lance's acquired brands miss growth expectations, or currency headwinds slam Mondelez again, those estimates and forward multiples might need to be recalculated.