Valuation multiples help investors decide on entry and exit points in securities. A company’s valuation multiple is impacted by its perceived growth, risks and uncertainties, and investors’ willingness to pay. Various multiples can be used to determine stocks’ valuations. For this analysis, we’ll be using PE (price-to-earnings) multiples, given the high visibility of pizza restaurants’ earnings.
The forward PE ratio is calculated by dividing a company’s current share price with its forecasted EPS (earnings per share) for the next 12 months.
Higher same-store sales growth, aggressive expansion, and higher operating margins made investors confident about Domino’s Pizza. Investors are also ready to pay more in order to earn higher returns in the future. This has led to a rise in its share price and PE multiple. At the end of 1Q16, Domino’s Pizza was trading at 31.2x. Now, it increased to 32.8x.
The initiatives taken by Papa John’s to improve the quality of its products and remove all artificial ingredients from its products appears to have gone well with investors. The company was trading at 22.9x at the end of 1Q16. Now, it increased to 29.1x. The better-than-expected 2Q16 results helped push the share price up.
There isn’t much deviation in Yum! Brands’ (YUM) PE multiple. At the end of 1Q16, the company was trading at 23.2x. It’s still trading at the same multiple. Its 1Q16 results were lower than expected. This pushed the PE multiple down. However, better-than-expected 2Q16 results pushed the share price and the PE multiple up.
Next, we’ll look at what analysts are recommending for pizza companies.