For our analysis, we have chosen the forward PE (price-to-earnings) multiple due to high visibility in Wendy’s (WEN) earnings. The forward PE multiple is calculated by dividing Wendy’s stock price by analysts’ EPS (earnings per share) estimates for the next four quarters.
Wendy’s forward PE multiple
Although Wendy’s stock price has fallen 1.6%, its forward PE multiple has risen due to lower earnings estimates from analysts in the next four quarters. As of November 10, 2017, Wendy’s was trading at a forward multiple of 27.4x—compared to 26.6x before the announcement of its 3Q17 earnings.
To drive its SSSG (same-store sales growth), Wendy’s plans to expand its delivery service to 2,500 restaurants, implement mobile ordering in 75% of its restaurants, and install 200 kiosks by the end of 2017. The company wants to increase the percentage of image activation restaurants by the end of 2017. All of these initiatives could increase Wendy’s expenses. If the initiatives don’t generate the intended sales, the higher expenditure could put pressure on the company’s future earnings.
For the next four quarters, analysts expect Wendy’s EPS to rise 24.4%, which could have already been accounted for in the company’s current stock price. If the company posts a lower EPS than analysts’ estimates, the selling pressure could bring the company’s stock price and valuation multiple down.
In the next part, we’ll discuss what analysts are recommending for Wendy’s.