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Comparing Valuation Multiples of Chipotle, Panera, Shake Shack

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Valuation multiples

In this part of the series, we’ll look at the valuation multiples of our three fast casual restaurants: Chipotle Mexican Grill (CMG), Panera Bread (PNRA), and Shake Shack (SHAK). For our analysis, we’ve considered the forward PE (price-to-earnings) multiple due to high visibility in fast casual restaurants’ earnings. The forward PE multiple is calculated by dividing the company’s stock price from analysts’ earnings estimates for the next four quarters.

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Peer comparisons

Since it’s still in the growth phase of its business life cycle, Shake Shack has a huge potential to expand. Investors have valued this highly, which has led Shake Shack to trade at a higher PE multiple than its peers. Since the announcement of its 1Q17 earnings, its forward PE multiple has risen due to analysts’ upgradations of the stock. As of June 14, 2017, Shake Shack was trading at a PE multiple of 69.1x compared to 60.7x before the announcement of its 1Q17 earnings.

Shake Shack is followed by Chipotle with a PE multiple of 45.4x. Since the announcement of its 1Q17 earnings, its PE multiple has fallen from 50.7x. Although Chipotle’s 1Q17 earnings were better than expected, investors are skeptical of Chipotle’s earnings since the following could lead to its stock and PE multiple falling:

  • competition from fast food restaurants
  • growth in cook-it-yourself meal kits
  • rise in the gap between the cost of eating at home and the cost of dining out

Since the announcement of its 1Q17 results, the PE multiple of Panera Bread has fallen from 38.5x to 37.9x. The fall was due to analysts raising their earnings estimates for the next four quarters.

Growth prospects

For the next four quarters, analysts are expecting Chipotle, Panera, and Shake Shack to post EPS growth of 182.1%, 13.8%, and 4.2%, respectively, which might have already been incorporated into their respective stock prices. If the companies’ earnings come in lower than analysts’ estimates, selling pressure could lower their stock prices and PE multiples.

You can mitigate these company-specific risks by investing in the iShares US Consumer Services (IYC), which has invested 11.3% of its holdings in travel and restaurant companies.

Next, we’ll look at analysts’ target prices and recommendations for our three companies.

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