Weak 1Q17 Sales Lowered Dunkin’ Brands’ Valuation Multiple
Valuation multiples help investors making investment decisions. They’re driven by growth prospects, risks, uncertainties, and an investor’s willingness to pay.
Of the various available valuation multiples, we’ve chosen the forward PE (price-to-earnings) multiple due to the high visibility of Dunkin’ Brands’ (DNKN) earnings. The forward PE multiple is calculated by dividing Dunkin’ Brands’ current stock price by analysts’ estimated earnings for the next four quarters.
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Dunkin’ Brands’ PE multiple
The lower-than-expected revenue and negative SSSG (same-store sales growth) of the Dunkin’ Donuts and Baskin-Robbins brands have made investors skeptical of its future earnings. That led to a fall in DNKN stock and the company’s PE multiple. As of May 9, 2017, Dunkin’ Brands was trading at 22.1x compared to 22.8x before the announcement of its 1Q17 earnings.
To improve sales, Dunkin’ Brands has been focusing on menu innovations and simplifications, the implementation of technological advancements, and driving consumer packaged goods and new channels. These initiatives are expected to increase the company’s expenses. If these initiatives fail to generate expected sales, the increased expenses will put pressure on the company’s earnings.
For the next four quarters, analysts are expecting Dunkin’ Brands to post EPS growth of 3.0%. If the company posts earnings that are lower than analysts’ estimates, selling pressures could lower the company’s PE multiple.
In the next part, we’ll look at analysts’ recommendations and their target price for Dunkin’ Brands.