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Positive 4Q15 Earnings Raised McDonald’s PE Multiple

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Valuation multiple

You should look at valuation multiples when deciding whether to enter or exit the stock. Valuation multiples are driven by perceived growth, risk and uncertainties, and investors’ willingness to pay. There are various multiples available. We chose the PE (price-to-earnings) ratio due to the high visibility in McDonald’s (MCD) earnings. The forward PE ratio is calculated by dividing the current share price by the forecasted EPS (earnings per share) for the next 12 months.

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McDonald’s PE multiple

McDonald’s PE multiple was flat at 22.07x after the announcement of its earnings on January 25. Over the next two days, it rose to touch 22.4x on January 27. Since the company’s 4Q15 earnings beat market expectations, both in the EPS and same-store sales growth, the PE multiple rose.

The reorganization strategy, all-day breakfast, and other measures taken by the company increased investors’ confidence. Now, investors are ready to pay more with the expectation of higher growth. If the company fails to achieve these expectations, then the stock could face selling pressure. This could bring the PE multiple down.

In 4Q15, McDonald’s PE multiple traded at 19x–23x. Analysts’ revised estimates helped the company’s PE multiple to rise. It’s trading close to its all-time high.

You can gain exposure to McDonald’s by investing in ETFs like the PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ). PEJ invests more than 6% of its portfolio in McDonald’s.

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