Investors look at valuation multiples when they’re deciding whether to enter or exit a stock. Valuation multiples are driven by perceived growth, risk and uncertainties, and investors’ willingness to pay.
There are various multiples available to evaluate a stock. We’ll use the PE (price-to-earnings) multiple due to the high visibility of restaurant companies’ earnings. The forward PE multiple is calculated by dividing the current share price with the forecast EPS (earnings per share) for the next 12 months.
PE ratios for restaurants
From the above graph, we can see that Domino’s Pizza (DPZ) is trading above its peers at 28.9x while McDonald’s (MCD) is cheaper among the five companies considered for analysis. MCD has a PE ratio of 20.4x. An aggressive expansion policy and higher margins have increased investor confidence in DPZ. However, Brexit uncertainty has made DPZ’s PE multiple fall.
MCD’s PE ratio also fell from 21.3x to 21x. MCD, which has posted better-than-expected results for the last three quarters due to the introduction of all-day breakfast and the announcement of its reorganization strategy, wasn’t affected that much, considering its exposure to European markets.
YUM! Brands (YUM), which earns 72.4% of its revenue from international markets, was the most affected by the Brexit vote. Its PE multiple fell from 22.9x to 21.9x. Starbucks’s (SBUX) PE multiple also fell from 27.2x to 26.5x. The PE multiple for Papa John’s (PZZA) fell from 26.7x to 26.2x.
MCD and YUM form 3.5% of the Vanguard Dividend Appreciation ETF (VIG).