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Strong Earnings Drove Jack in the Box’s Valuation Multiple

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Aug. 13 2018, Updated 1:01 p.m. ET

Valuation multiple

Of all the valuation multiples available, we have opted for the forward PE multiple due to high visibility in Jack in the Box’s (JACK) future earnings. The forward PE multiple is calculated by dividing the company’s stock price by analysts’ EPS estimates for the next four quarters.

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Jack in the Box’s forward PE multiple

Management’s strong third fiscal quarter earnings and initiatives to drive the company’s sales appear to have increased investors’ confidence, which led to a rise in its stock price and valuation multiple. As of August 9, Jack in the Box was trading at a forward PE multiple of 19.3x—compared to 17.9x before the announcement of its third fiscal quarter earnings.

From the above graph, you can see that Jack in the Box is trading below its peers’ median valuation multiple. Compared to its peers, Jack in the Box’s SSSG (same-store sales growth) and its margins were on the lower side, which caused the company to trade at a lower valuation multiple. On the same day, McDonald’s (MCD), Wendy’s (WEN), and Restaurant Brands International (QSR) were trading at forward PE multiples of 19.9x, 28.2x, and 22.3x, respectively.

Growth prospects

Jack in the Box is focused on innovating its menu, expanding its delivery service, reimaging its drive-thrus, and implementing its digital menu boards to drive its sales. All of these initiatives could increase the company’s expenditure. If the initiatives don’t generate the expected sales, the increased expenditure could put pressure on Jack in the Box’s future earnings.

For the next four quarters, analysts expect Jack in the Box to post EPS growth of 16.2%, which could have been incorporated into the company’s current stock price. If the company’s earnings are lower than analysts’ expectations, the selling pressure could bring the company’s stock price and its valuation multiple down.

Next, we’ll discuss analysts’ recommendations.

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