Are these FTSE 100 stocks getting too expensive?
Pest control company Rentokil Initial(LSE: RTO) today reported a 13.7% rise in ongoing third-quarter revenues to £579.5m, as the contribution of recent acquisitions helped to bolster its financial performance.
However, organic revenue growth also accelerated from 3.1% last year, to 3.7%, reflecting strong demand increases for its pest control products and higher brand popularity. Rentokil highlighted continuing strong performances in Asia, Pacific, Latin America, and in its largest market, North America, while Europe also delivered a further improvement in ongoing revenue expansion, with revenues in France up 2.4% year-on-year.
On the downside though, the firm warned of disruption to trading from recent hurricanes, which devastated the Caribbean and some southern states in the US in September. Though trading has now returned to normal in most of these markets, business in Puerto Rico is expected to remain severely impacted for some time.
Nevertheless, CEO Andy Ransom was pleased with the ongoing progress and in today's announcement said: "It has been a good period for M&A with six businesses acquired in Growth and Emerging markets, principally in Pest Control...Notwithstanding the impact of severe weather conditions on some of our businesses in the third quarter, prospects remain good for the remainder of the year across the majority of our markets, and our guidance for the full year is unchanged."
City analysts are sanguine with forecasts of underlying earnings per share growth of 12% in 2017 and 9% in 2018. However, I'm concerned about valuations -- shares in the company trade at 25.2 times forward earnings, against its five-year historical average of 17.2 times.
Another FTSE 100 stock that I believe is beginning to look too pricey is product inspection services firm Intertek Group(LSE: ITRK). The London-headquartered group is one of the world's leading providers of assurance, testing, inspection and certification services to a wide range of industries, which include chemicals, energy, food, retail and healthcare.
Although the company's revenue stability and its highly cash generative earnings model have meant Intertek has historically traded at a premium to the rest of the market, its shares appear to me to be getting ahead of themselves after recent gains.
Intertek has seen its share price gain 49% since the start of the year, which has elevated its valuations to 27.5 times expected earnings this year. That compares unfavourably to its five-year historical average for forward P/E of 21.9 times and puts the stock on a significant premium to the sector median of 17.1 times.
What's more, this doesn't seem justified on City forecasts for underlying earnings per share growth of 11% in 2017 and 7% in 2018, which are only modestly higher than the estimates for its sector peers. As such, I reckon that Intertek's stock may struggle to gain traction in the near term, in the absence of substantial positive earnings estimate revisions.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Intertek. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.