Valuation multiples help investors access comparable companies. For our analysis of McDonald’s (MCD), we’ve opted for the forward PE (price-to-earnings) multiple, due to the high visibility of McDonald’s earnings.
The forward PE multiple is calculated by dividing the company’s stock price by the analysts’ earnings estimate.
McDonald’s forward PE multiple
From the above graph, you can see that McDonald’s forward PE multiple has been on the rise since the beginning of 2017. As of January 22, 2018, McDonald’s was trading at a forward PE multiple of 24.5x, compared with 19.7x at the beginning of 2017.
The better-than-expected quarterly results in the first three quarters and the measures adopted by the company’s management to drive SSSG (same-store sales growth) appear to have increased investor confidence, leading to a rise in the company’s stock price and its valuation multiple.
To enhance the customer experience at its restaurants, McDonald’s has been expanding its delivery service to more number of restaurants, remodeling its old restaurants to EOTF (Experience of the Future), and deploying mobile order and pay facilities at its restaurants. These initiatives are expected to increase the company’s expenditures. If these initiatives fail to produce expected sales, the increased expenses could put pressure on MCD’s future earnings.
For the next four quarters, analysts are expecting McDonald’s to post EPS (earnings per share) growth of 9.1%, which could have been factored into the company’s current stock price. If the company posts earnings lower than the analysts’ estimates, the selling pressure could bring down both MCD’s stock price and its valuation multiple.
In the next and final part of this series, we’ll check in with the analysts’ recommendations.