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 in Dunkin’ Brands’ (DNKN) earnings. The forward PE multiple is calculated by dividing the company’s current stock price by earnings estimate for the next four quarters.
DNKN’s forward PE multiple
The better-than-expected 3Q17 revenue, an aggressive expansion plan for Dunkin’ Donut restaurants, and the enactment of tax reforms appear to have increased investors’ confidence, leading a rise in the company’s stock price and valuation multiple. As of January 29, Dunkin’ Brands was trading at 23.7x, compared to 21.2x before the announcement of its 3Q17 earnings.
From the above graph, we can see that the forward PE multiple for Dunkin’ Brands has increased since the beginning of 2017, lowering the gap between the company’s valuation multiple and peers’ median. The strong performance in the first three quarters of 2017 has improved Dunkin’ Brand’s valuation multiple. On the same day, its peers Starbucks (SBUX), McDonald’s (MCD), and Wendy’s (WEN) were trading at a forward multiple of 22.2x, 24.3x, and 28.1x, respectively.
For the next four quarters, analysts expect Dunkin’ Brands EPS to rise 6.7%, which could have been cooked into the company’s current stock price. If the company posts earnings lower than analysts’ expectations, the selling pressure could bring the company’s stock price and valuation multiple down.
Next in this series, we’ll look at analysts’ recommendations.