Key Points
Dutch Bros share price has dropped lately.
The price drop improved the valuation.
The shares still trade at a premium to the market average.
One way to measure the expensiveness or cheapness of a stock is to compare price-to-earnings (P/E) ratios. However, a lower multiple in comparison to other stocks doesn't automatically mean a stock's a buying opportunity. Nor should you necessarily avoid those with a higher multiple.
A higher P/E ratio does mean that investors have higher growth expectations. That's not a bad thing, and if a company can meet or exceed them, you can make money.
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Dutch Bros (NYSE: BROS) trades at a P/E ratio of 58. That's more than double the S&P 500 index's P/E ratio of 26. Should Dutch Bros' relatively high multiple turn off investors?
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When working to answer the question, it's important to look at the company's P/E ratio in historical context. Dutch Bros' shares had an earnings multiple of 100 at the start of the year, and it rose to about 110 in late June. Over the long term, the stock has a three-year median P/E ratio of 141.
Until recently, investors certainly had high growth expectations, and the stock outperformed the market. The shares gained 64.5% for the three years ended on Oct. 16, trailing the S&P 500's 84.5% total return.
The company's drive-through locations offer coffee, energy drinks, and other beverages (e.g., tea, lemonade, smoothies, and soda). Some locations also offer limited food options. That sounds like an ultra-competitive business, but the company differentiates itself through speed, quality, and customer service.
Dutch Bros appears to have struck a chord with customers, and it continues to grow sales and add locations (48 in the June quarter). Second-quarter same-store sales grew 5.8%, with higher traffic contributing 1.7 percentage points. That made it 13 straight quarters of comps growth.
A P/E ratio of over 100 certainly seems like an inflated valuation. I wouldn't call Dutch Bros a value stock, but its current multiple is much more reasonable.
I wouldn't stay away from the shares based on the current P/E ratio. Given the growth opportunity, long-term investors should strongly consider the stock.
Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Dutch Bros. The Motley Fool has a disclosure policy.