Equity valuation models for restaurant industry
Date
2012
Authors
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Publisher
University of Delaware
Abstract
The U.S. restaurant industry has been significantly impacted by the 2008 financial crisis, and the phenomenon of undervalued restaurant stocks has attracted attention. The undervaluation of restaurant stock was consistently addressed by restaurant CEOs and financial analysts, since late 1990s. Nevertheless, there has been little research on how analysts value restaurant stocks. Therefore, the purpose of this study was to examine the existing valuation models used to value restaurant stocks and determine which ones are more effective. A non-experimental quantitative research design was employed, to compare the valuation errors of each valuation model. This study included 50 restaurant companies All of the financial data, including historical and forecasted data, were collected from 2005 to 2012, using the Bloomberg and FactSet databases. First of all, this study compared the present value models and multiples valuation models, based on valuation accuracy and performance of valuation models. Overall, multiples valuation models estimated stock values more accurately and provided more accurate predictions than the residual income model. Second, this study extended the analysis of multiples valuation models, by comparing four different multiples. The four multiples were, the P/E, forecasted P/E, the EBITDA, and Book value multiple. The EBITDA multiple yielded more accurate predictions and performed better than other multiples. Lastly, this study discussed the undervaluation of restaurant stocks. More than 53 percent of estimations based on valuation models were undervalued, especially the estimations by the residual income model and the forecasted P/E multiple were more undervalued than by other valuation models. Both models predominantly used the forecasted P/E, estimated by Bloomberg analysts. This finding indicated that analysts tend to underestimate restaurant stocks. This study will help to fill the gap in stock valuation research in restaurant industry. Furthermore, by suggesting the EBITDA multiples valuation as an effective valuation model, this study can assist investors to build their investment strategy in the restaurant market. This study also encourages analysts to be aware of the undervaluation of restaurant stocks. Keywords: Valuation Model, Restaurant Industry, Undervaluation, Residual Income Model, Multiple Valuation Model