Fast-Food Comparable Company Analysis

Comparable Company Analysis (comps) is a simple method used to help estimate a value for a company compared to its competitors. It involves the comparison of key financial metrics. Actually completing one was trickier than anticipated.

Originally, I planned to analyse some of the major publicly traded fast food companies in the US. I selected: McDonald’s, Domino’s, Papa John’s, Wingstop, Shake Shack and was going to predict the metrics of another fast-food firm using the data from those companies. However, I ran into a couple of problems along the way.  This piece tends towards early investment analysis, more of a series of mini stock pitches rooted from comps.

Embarrassingly, finding the correct stock took longer than expected. I naively expected that searching up a stock would return the ‘one stock’ that company traded under. Here’s what I learnt:

·       Many companies are dually listed on different stock exchanges and in different currencies due to geographical locations, which does make perfect sense on reflection.

·       Many  companies issue different classes of stocks which gives holders different perks and rights.

·       Large conglomerates may operate under different corporate entities based on location. While I am sure this is obvious to many of you, I am glad I found this out through my own writing and not in an interview!

Secondly, there were more outliers than anticipated as you will see later. Wingstop and Shake Shack gave surprising results

Therefore, I thought it would be more fitting to analyse each company individually and dissect what the numbers tell us, more of a stock pitch than a proper comps. I will publish complete comps as I build on my financial acumen but for now, please accept my speculative analysis based off my own research and general finance reading.

Table 1: Raw Data (2024) * data taken from NASDAQ website

Table 2: Brief Ratio Definitions

McDonald’s

The ratios are as expected for the undoubtedly biggest fast-food chain in the world, safe. PEG ratio (2.6) is high but that makes sense, it’s a defensive stock not expected to grow, rather used to tick over the inflation mark. The P / E ratio of 25.45 tells the same story. EV / Revenue (10.01) is high, it shows investors faith in the McDonald’s brand paying over $10 for every 1$ off revenue. EV / EBITDA (18.74) again shows a premium price for a premium company.

Domino’s

EV / Revenue (4.16) is much lower than McDonald’s but EV / EBITDA (19.62) suggests it is also a safe stock. PEG ratio (2.3) and P / E ratio 25.8  shows investor faith, it is another worthy investment for steady returns.

Papa John’s

Unfortunately, Papa John’s is not such a successful story. EV / Revenue (1.09) is alarmingly low reflecting poor investor faith in the company, only amplified by EV / EBITDA which again is much lower than competitors. PEG ratio is 1.2 which almost hints at an undervaluation. Afterall Peter Lynch, one of America’s most famous investos does recommend looking at stocks with a PEG ratio below 1. Similarly, a low P / E ratio (14.21) does show the lowest wait for returns. However, Papa John’s has been in freefall over in recent years. Share price has fallen from $140.68 on 01/11/21 to $38.27 at time of writing according to Yahoo!Finance.

Wingstop

Wingstop is a much more promising firm. EV / Revenue (14.96) is even higher than McDonald’s reflecting investor excitement. EV EBITDA (51.24) is very high though, this could be a problem if growth slows. P/E ratio (83.1) is also very high, again this could show investor’s high expectations or perhaps an overvaluation. PEG ratio again is high which shows a value hopefully justified by future earnings.

Shake Shack

EV / Revenue (4.71) is average not giving much away. However, combined with a high EV / EBITDA (52.7) and an insane P / E ratio (649) shows it is running at razor thin profit margins. PEG ratio (2.5)  again is quite high, potentially suggesting growth but I think it is more the case of an overvalued stock.

While this was not the intended Comparable Company Analysis, I found this very useful. It was an opportunity to start investigating stocks using key metrics. Despite not going to plan, this was still a useful exercise and has built on my growing knowledge of finance.

Please check out the rest of the site and my previous piece, a DCF analysis on Coca-Cola