It’s important to consider valuation multiples when deciding whether to enter or exit a stock. Valuation multiples are driven by perceived growth, risks and uncertainties, and investors’ willingness to pay.
Various multiples are available for the evaluation of a stock. We’ll use PE (price-to-earnings multiple) due to the high visibility of Dunkin’ Brands’ (DNKN) earnings. Forward PE is calculated by dividing a company’s current share price by its EPS (earnings per share) forecast for the next 12 months.
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Although Dunkin’ Brands’ 3Q16 earnings were lower than expected, the company’s stock has risen 1.9% since the announcement of its 3Q16 earnings on October 20, 2016. The measures adopted by the company to improve its same-store sales growth (or SSSG) and the victory of President Donald Trump appear to have increased investors’ confidence, leading to rise in DNKN’s stock price and PE. On January 30, 2017, Dunkin’ Brands was trading at PE of 21.6x, up from 21.3x on October 19, 2016.
On the same day, Dunkin’ Brands’ peers Starbucks (SBUX) and Panera Bread (PNRA) were trading at PEs of 25x and 27.5x, respectively. The business model adopted by Dunkin’ doesn’t allow the company to expand aggressively. Dunkin’ Brands’ same-store sales growth is lower than those of its peers, leading the company to trade at a lower multiple.
For the next four quarters, analysts are expecting Dunkin’ Brands to post earnings per share (or EPS) of $2.39, representing a rise of 12.2% over the corresponding quarters of the previous year. Dunkin’ Brands’ current share price may have already factored in this EPS growth. If the company’s results are lower, its stock could face selling pressure, bringing its PE multiple down.
You can mitigate company-specific risks by investing in the iShares US Consumer Services ETF (IYC). IYC has 11.9% of its holdings in restaurant and travel companies.
In the next and final part of this series, we’ll look at analysts’ recommendations and price targets for Dunkin’ Brands for the next 12 months.