Valuation multiples help investors compare companies with similar business models. For our analysis, we’ve opted for the forward PE (price-to-earnings) multiple due to the high visibility of the earnings of fast food restaurants. A forward PE multiple is computed by dividing a company’s stock price from analysts’ EPS estimates for the next four quarters.
Forward PE multiple
From the above graph, we can see that Wendy’s (WEN) is trading above its peers’ valuation multiples. Wendy’s owns approximately 18% of Arby’s, which acquired Buffalo Wild Wings (BWLD). The acquisition by Arby’s increased WEN stock, thus raising its forward PE multiple. As of December 18, 2017, Wendy’s was trading at a forward PE multiple of 29.5x.
Wendy’s was followed by McDonald’s (MCD) with a forward PE multiple of 25.0x. Before the announcement of its 3Q17 earnings, the company was trading at 23.6x. Its strong 3Q17 performance and initiatives such as the implementation of technological advancements, the introduction of dollar menus, and the expansion of delivery services have increased McDonald’s valuation multiple, thus raising its stock.
McDonald’s was followed by Restaurant Brands International (QSR). On December 18, 2017, it was trading at a forward PE multiple of 23.7x compared to 27.8x before the announcement of its 3Q17 earnings. The decline in same-store sales in Popeyes Louisiana Kitchen and lower-than-expected SSSG (same-store sales growth) in Tim Hortons has led to a fall in QSR stock as well as its valuation multiple.
Jack in the Box (JACK) has been trading at a lower forward PE multiple than its peers. The business model adopted by JACK doesn’t allow it to expand aggressively, which, along with lower margins, has allowed the company to trade at a lower valuation multiple. On December 18, 2017, JACK was trading at a forward PE multiple of 20.9x.
Next, we’ll look at analysts’ recommendations for the four fast food restaurants we’re covering in this series.