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Why Did DPZ’s Valuation Multiple Fall after Its 4Q16 Earnings?

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Valuation multiples

Valuation multiples provide useful information for investors when they consider whether to enter or exit a stock. Factors such as perceived growth, risk and uncertainties, and the investors’ willingness to pay for a particular stock drive valuation multiples. Investors use a variety of multiples when evaluating a stock.

We’ll look at Domino’s Pizza’s (DPZ) earnings using its PE (price-to-earnings) ratio. You can calculate the forward PE ratio by dividing the company’s current share price by its earnings per share (or EPS) forecast over the next 12 months.

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DPZ’s PE multiple

Despite the rise in its stock price after its strong 4Q16 earnings release, DPZ’s PE multiple has declined. On March 1, 2017, Domino’s Pizza traded at a PE multiple of 34.9x compared to 36.2x before the announcement of its 4Q16 earnings.

After the company’s strong 4Q16 earnings release, analysts raised their 2017 earnings estimate 1.4% from $5.15 to $5.22. The rise in its EPS estimates lowered DPZ’s valuation multiple.

On the same day, DPZ’s peers Yum! Brands (YUM) and Papa John’s Pizza (PZZA) were trading at PE multiples of 23.5x and 27.5x, respectively. DPZ’s aggressive expansion strategy, combined with its higher same-store sales growth, appears to have helped the company trade at a higher valuation multiple than its peers. When growth expectations are higher, the market tends to value companies at higher multiples.

Growth prospects

For the next four quarters, analysts expect Domino’s Pizza (DPZ) to post earnings per share of $5.22 in 2017, which represents year-over-year growth of 21.1% compared with 2016. If DPZ’s actual results are lower, its stock could be affected by selling pressures, which could subdue its PE multiple, and vice versa.

For broad-based exposure to the restaurant industry, you can consider the Consumer Discretionary Select Sector SPDR ETF (XLY). XLY holds 9.8% of its investments in travel and restaurant companies.

In the final article in this series, we’ll look at analysts’ recommendations for DPZ stock.

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