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Comparing Valuation Multiples for Casual Dining Restaurants

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Jun. 30 2016, Updated 4:04 p.m. ET

Valuation multiples

Valuation multiples help investors decide on entry and exit points in securities. A company’s valuation multiple is affected by its perceived growth, risks and uncertainties, and investors’ willingness to pay. Due to the high visibility of restaurant companies’ earnings, we’ll look at PE (price-to-earnings) multiples of the companies under review in this series.

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Peer comparisons

As of June 19, 2016, casual dining restaurants were trading at a median PE multiple of 17.9x. On the same day, Texas Roadhouse (TXRH) was trading higher than the other four companies with a PE multiple of 25x.

TXRH’s better-than-expected result pushed up its PE multiple to 25x from 21.5x on January 1, 2016.

TXRH was followed by Buffalo Wild Wings (BWLD). The decline in its revenue and margins led investors to move away from the company. This led to a decline in its PE multiple from 24.5x to 23.9x.

During the same period, The Cheesecake Factory’s (CAKE) valuation multiple increased from 17.6x to 17.9x.

Negative same-store sales growth has made investors skeptical about Brinker International’s (EAT) future earnings. The decline in investor confidence has led to a fall in EAT’s share price and PE multiple. Its PE multiple has declined from 12.8x to 12.7x.

After lower-than-expected 4Q15 results, Bloomin’ Brands (BLMN) showed signs of recovery through its 1Q16 results, which pushed its valuation multiple from 12x to 12.8x.

You can mitigate company-specific risks by investing in the Consumer Discretionary Select Sector SPDR ETF (XLY). XLY has invested 10% of its investments in restaurant and travel companies.

In the final part of our series, we’ll see why analysts are favoring Bloomin’ Brands in the casual dining restaurant space.

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