How Does Dunkin’ Brands’ Valuation Compare to Its Peers’?
Due to Dunkin’ Brands’ (DNKN) high visibility, we’ve considered forward PE (price-to-earnings multiple) for our analysis of its stock.
Forward PE is calculated by dividing a company’s stock price by analysts’ earnings estimates for it over the next four quarters.
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Dunkin’ Brands’ forward PE
In 1Q17, the same-store sales growths (or SSSG) of Dunkin’ Donuts and Baskin-Robbins were lower than analysts’ estimates. Franchisees’ aggressive rises in menu prices led to lower-than-expected SSSG, which led to falls in Dunkin’ Brands’ stock price and valuation multiple. On July 19, 2017, the company was trading at a forward PE of 20.7x, compared to 22.8x before the announcement of its 1Q17 earnings.
In the above graph, we can see that Dunkin’ Brands valuation multiple is trading below the peer median. Since the beginning of 2016, the company’s SSSG has been on the low side, which has led to its trading at lower valuation multiples than its peers.
To improve the quality of its menu items, Dunkin’ Brands has announced the removal of all artificial colors from its products by the end of 2018. The company has been focusing on enhancing the customer experience by implementing technological advancements, expanding its delivery service to more distribution points, and remodeling its old distribution points.
These initiatives are expected to increase the company’s expenses. If these initiatives fail to generate the expected sales, the company’s increased expenses are likely to put pressure on its margins, lowering its earnings.
For the next four quarters, analysts expect the company to post EPS growth of 3.4%, which may already be incorporated into its stock price. If the company posts earnings that are lower than analysts’ estimates, selling pressures will likely lower its stock price and valuation multiple.
Next, let’s look at analysts’ recommendations and target prices for DNKN.