Of all the valuation multiples available, we have opted for the forward PE (price-to-earnings) multiple for our analysis due to high visibility in Yum! Brands’ (YUM) future earnings. The forward PE multiple is calculated by dividing the company’s stock price from analysts’ earnings estimates for the next four quarters.
Yum! Brands’ forward PE multiple
The strong second-quarter EPS and unit growth appear to have increased investors’ confidence, leading to a rise in Yum! Brands stock price and its valuation multiple. As of August 3, Yum! Brands was trading at a forward PE multiple of 22.2x compared to 21.7x before the announcement of its second-quarter earnings.
The above graph shows that Yum! Brands was trading above Papa John’s (PZZA) PE multiple and lower than Domino’s Pizza (DPZ). On the same day, Domino’s Pizza and Papa John’s were trading at forward PE multiples of 31.0x and 18.3x, respectively. Positive SSSG and higher margins have allowed Yum! Brands to trade above Papa John’s valuation multiple.
For the next four quarters, analysts expect Yum! Brands’ EPS to rise 3.6%, which could have been factored 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 its valuation multiple down.
Next, we’ll look at analysts’ recommendations.