Due to high visibility in The Cheesecake Factory (CAKE), we have chosen the forward PE (price-to-earnings) multiple for our analysis. The forward PE multiple is calculated by dividing the company’s stock price by analysts’ sales estimates for the next four quarters.
Forward PE multiple
Management’s lower SSSG (same-store sales growth) and EPS (earnings per share) guidance for 2017 could have made investors skeptical about its future earnings. As a result, The Cheesecake Factory’s stock price and valuation multiple fell. As of August 30, 2017, The Cheesecake Factory was trading at a forward PE multiple of 14.51x—compared to 15.8x before the announcement of its 2Q17 earnings. On the same day, its peers Texas Roadhouse (TXRH), Brinker International (EAT), and Buffalo Wild Wings (BWLD) were trading at 22.5x, 9.7x, and 19.3x, respectively.
In the above graph, you can see that The Cheesecake Factory’s valuation multiple is trading at a lower PE multiple than its peers’ median. Compared to its peers, The Cheesecake Factory’s margins are on the lower side. Also, The Cheesecake Factory’s business model doesn’t allow it to expand aggressively. As a result, the company trades at a lower multiple than its peers.
For the next four quarters, analysts expect The Cheesecake Factory’s EPS to fall 6.6%, which could have been factored into the company’s current stock price. If the company’s earnings are lower than analysts’ estimates, the selling pressure could lower the company’s stock price and its peers’ multiple.
Analysts expect The Cheesecake Factory’s stock price to reach $48.93 in the next 12 months, which represents a return potential of 19.7%. Of the 21 analysts that follow The Cheesecake Factory, 28.6% recommend a “buy,” 66.7% recommend a “hold,” and 4.8% recommend a “sell.” On August 3, 2017, Maxim, Telsey Advisory Group, Barclays, and Morgan Stanley cut their 12-month target prices for The Cheesecake Factory.