Valuation multiples help investors to decide whether to enter or exit stocks. Due to the high visibility of restaurant companies’ earnings, we’re choosing to look at the price-to-earnings (or PE) multiples of the companies under review in this series.
The forward PE ratio is calculated by dividing a company’s current share price with its forecast EPS (earnings per share) for the next 12 months.
Since the beginning of 4Q15, the median PE of the companies in the chart above has been in the range of 20.6x–24.9x. As of March 6, 2016, the median multiple was 23.6x, indicating investors’ confidence in fast food and pizza companies.
Of all the companies mentioned above, Domino’s Pizza (DPZ), which has been trading in the range of 25.8x–32.4x, has the highest PE multiple at 31.8x, followed by Restaurant Brands International (QSR) at 29.5x and Papa John’s (PZZA) at 24.5x. Since October 2015, QSR has been trading in the range of 23.8x–34.5x, while PZZA has been trading in the range of 19.1x–31.1x.
McDonald’s (MCD) and Sonic (SONC) have been trading at PE multiples of 21.7x and 22.3x, respectively, close to their respective highs from October 2015. Wendy’s Company (WEN) and Sonic (SONC) have been trading at 26.7x and 22x, respectively, close to the midpoints of their respective ranges. With a PE multiple of 18.8x, Jack in the Box (JACK) has the lowest PE multiple of all eight stocks.
You can mitigate company-specific risks by investing in the SPDR Dow Jones Industrial Average ETF (DIA), which has invested more than 4% of its portfolio in McDonald’s.