Valuation multiples help investors compare companies with a similar business model. For our analysis, we have opted for the forward PE (price-to-earnings) multiple due to the high visibility of Yum! Brands’ (YUM) earnings. A forward PE multiple is calculated by dividing a company’s stock price from analysts’ earnings estimates.
YUM’s forward PE multiple
The lower-than-expected 4Q17 SSSG (same-store sales growth) and revenue along with weakness in the broader market have led to a fall in Yum! Brands stock and its valuation multiple. As of February 9, 2018, Yum! Brands was trading at a forward PE multiple of 24.0x compared to 24.6x before the announcement of its 4Q17 earnings. On the same day, peers Domino’s Pizza (DPZ) and Papa John’s International (PZZA) were trading at 26.0x, and 19.6x, respectively.
To drive its SSSG, Yum! Brands has been focusing on menu innovations, implementation of technological advancements, and remodeling of old restaurants. These initiatives are expected to increase Yum! Brands’ expenses. If these measures fail to generate expected sales, the increased expenditure could put pressure on the company’s earnings.
For the next four quarters, analysts are expecting Yum! Brands’ EPS (earnings per share) to rise 9.4%, which could have been incorporated into the company’s current stock price. If the company posts earnings lower than analysts’ estimates, selling pressure could bring the stock and the company’s valuation multiple down.
Next, we’ll look at analysts’ recommendations for Yum! Brands.