Investors look at valuation multiples when deciding whether to enter or exit a stock. Valuation multiples are driven by perceived growth, risk and uncertainties, and investor willingness to pay.
There are various multiples available to evaluate a stock. We’ll use the PE (price-to-earnings) multiple for Wendy’s (WEN), due to the high visibility of its earnings. Please note that the forward PE multiple is calculated by dividing the current share price by the forecasted EPS (earnings per share) for the next 12 months.
Wendy’s PE multiple
Due to its high growth strategy, Wendy’s has been trading at higher PE multiple than the peer median. Before its 1Q16 results, the company was trading at PE multiple of 29.7x. But the caution expressed by Wendy’s management that the 2Q16 same-store sales growth would be lower than its earlier guidance value of 3% led investors to move away from Wendy’s.
This movement, in turn, led to a decline in WEN’s share price, which brought its PE multiple down. As of June 29, 2016, Wendy’s was trading at a PE multiple of 25.7x. During the same period, McDonald’s (MCD), Jack in the Box (JACK), and Restaurant Brands International (QSR) were trading at multiples of 21x, 21.3x, and 28.2x, respectively.
Analysts are expecting Wendy’s EPS for next four quarters to decline by 24.5%, which may have already been factored into the share price. If the company delivers results other than this, the share price will likely move accordingly, thus affecting its PE multiple.
Remember, you can mitigate such company-specific risks by investing in ETFs like the Guggenheim S&P 500 Pure Growth ETF (RPG), which has 44% of its portfolio in restaurants and travel companies.
In the next and final part, we’ll look at analyst recommendations and price targets for the next 12 months.