Valuation multiples help investors access a company’s value and compare it with its peers. We have opted for the forward PE (price-to-earnings) multiple due to greater visibility in McDonald’s (MCD) earnings.
McDonald’s forward PE multiple
The introduction of new menu items, implementation of digital enhancements, and better-than-expected 2Q17 earnings appear to have increased investors’ confidence. As a result, there was a rise in McDonald’s stock price and valuation multiple. As of October 17, 2017, McDonald’s was trading a forward PE multiple of 23.95x—compared to 22.78x before the announcement of its 2Q17 earnings.
In the above graph, you can see that McDonald’s is trading below its peers’ median valuation multiple. Since it’s in the mature stage of its business life cycle, McDonald’s has a minimal scope for expansion. The company traded at a lower valuation multiple. McDonald’s peers, Jack in the Box (JACK), Wendy’s (WEN), and Restaurant Brands International (QSR) were trading at forward PE multiples of 20.81x, 28.96x, and 28.81x, respectively.
To drive its SSSG (same-store sales growth), McDonald’s has been focusing on menu innovations, enhancing customers’ experience through implementing digital advancements, and expanding its delivery service to more restaurants. These initiatives have increased McDonald’s expenditure. If the initiatives don’t generate the expected sales, the increased expenses could put pressure on McDonald’s earnings.
For the next four quarters, analysts expect McDonald’s earnings per share to rise 7.4%, which could have been factored into its current stock price. If the company doesn’t meet analysts’ earnings estimate, the selling pressure could lower the company’s stock price and valuation multiple.
In the next part, we’ll discuss analysts’ recommendations.