Valuation multiples help investors to decide whether to enter or exit stocks. A company’s valuation multiple is affected by its perceived growth, risks and uncertainties, and investors’ willingness to pay.
For this analysis, the valuation measure we’ve chosen is the PE (price-to-earnings) multiple, due to the high visibility of Jack in the Box’s (JACK) earnings. The forward PE ratio is calculated by dividing a company’s current share price by its forecast EPS (earnings per share) for the next 12 months.
JACK’s PE multiple
The initiatives taken by JACK to improve its same-store sales growth (or SSSG) and its margins appear to have increased investors’ confidence, leading to a rise in its share price and PE multiple. On December 29, 2016, JACK was trading at 22.8x, up from 20.8x prior to its fiscal 4Q16 earnings release.
Because JACK operates a higher number of company-owned restaurants than its peers, its margins are lower than those of its peers. The business model adopted by the company doesn’t allow it to expand aggressively, which could be a reason it’s trading at a lower multiple than the peer median.
JACK’s product quality improvement measures and its introduction of new Brunchfast menu items are expected to increase its operating expenses. If these initiatives fail to generate the anticipated SSSG, the company’s increased expenses could put pressure on its margins, lowering its earnings.
In fiscal 2017, analysts expect JACK to post an EPS rise of 21.9%. The company’s current stock price may have already factored in this rise. If the company’s results come in lower than expected, its stock could face selling pressures.
You can mitigate company-specific risks by investing in the iShares U.S. Consumer Services ETF (IYC). IYC has invested 12% of its holdings in restaurant and travel companies.
Next, we’ll see what analysts are recommending for JACK.