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There were 36,899 McDonald's Company restaurants in 120 countries as of December 31, 2016. Shake Shack,...

There were 36,899 McDonald's Company restaurants in 120 countries as of December 31, 2016. Shake Shack, Inc., a much newer fast-food restaurant company, began operations as a hot dog cart in 2001. It incorporated on September 23, 2014, and had it initial public offering of stock on February 4, 2015. As of December 31, 2016, it had 114 restaurants operating in 16 states and 13 countries. The following data were taken from the companies’ December 31, 2016, annual reports:

McDonald's

Shake Shack

Net earnings (in thousands)

$4,686,500

$12,446

Earnings per share

$ 5.49

$ 0.54


The following data were taken from public stock-price quotes:


Stock price per share on February 27, 2017

$126.99

$36.75

(Two months after the end of their 2016 fiscal years.)

Required

  1. Compute the price-earnings ratios for each company as of February 27, 2017.
  2. Which company’s future performance did the financial markets appear to be more optimistic about as of February 27, 2017?
  3. Provide some reasons why the market may view one company’s future more optimistically than the other.
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Answer #1
1)P/E RATIO MARKET VALE PER SHARE/EARNINGS PER SHARE
MCDONOLDS P/E RATIO 126.99/5.49 $    23.13
SHAKE SHACK 36.75/.54 $    68.06
2) SHAKE SHACK future performance did the financial markets appear to be more optimistic about as of February 27, 2017
(HIGHER P/E RATIO
3) HIGHER P/E RATIO
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E
A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends.
The price-to-earnings ratio can also be seen as a means of standardizing the value of one dollar of earnings throughout the stock market. In theory, by taking the median of P/E ratios over a period of several years, one could formulate something of a standardized P/E ratio, which could then be seen as a benchmark and used to indicate whether or not a stock is worth buying.
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