A valuation multiple helps investors to decide whether to enter or exit a stock. The valuation multiple of a company is affected by its perceived growth, risk and uncertainties, and investors’ willingness to pay.
For this analysis, the valuation measure we’ve chosen is the PE (price-to-earnings) ratio due to the high visibility of Jack in the Box’s (JACK) earnings. The forward PE ratio is calculated by dividing the current share price by forecasted EPS for the next 12 months.
JACK’s PE multiple
The initiatives taken by Jack in the Box to improve the quality of its products appear to have yielded results. In fiscal 3Q16, the company posted better-than-expected same-store sales growth and earnings. This could have prompted the company management to raise its EPS estimates. Seeing customers’ positive response to the initiatives taken by company management, analysts have raised their EPS forecast for the next four quarters by 4.5% to $4.4 from the earlier estimate of $4.2. All these factors appear to have increased investors’ confidence, thus pushing the PE multiple up.
After the announcement of 3Q16 results, Jack in the Box’s PE multiple increased from 20.7x to 21.8x. During the same period, Wendy’s (WEN), Restaurants Brand International (QSR), and Dunkin’ Donuts (DNKN) were trading at 25.5x, 28.8x, and 19.6x, respectively.
Risks and uncertainties
With the intention of improving the quality of its food products, Jack in the Box has modified 30 of its core products. The company is also focusing on menu innovations to improve its same-store sales growth. These initiatives could have prompted analysts to forecast EPS of $4.4 in the next four quarters, which represents a year-over-year growth of 21.7%. Jack in the Box’s current share price might have factored into the EPS growth. If the company’s results come in lower, the stock could face selling pressure.
Next, we will look at what analysts are recommending for Jack in the Box.