Is Yum Brands a Good Stock to Buy?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many of Yum! Brands’ (NYSE: YUM) customers haven’t even heard of the company taking their order- they only know it through its restaurant brands or “concepts.” Taco Bell, Pizza Hut, and KFC are all owned by Yum, which at a $30 billion market cap is the second largest restaurant stock after McDonalds (NYSE: MCD). By providing quick service Mexican food, chicken, and pizza (sometimes even under the same roof in combination restaurants) the company can satisfy a variety of tastes from diners on the go.
A number of hedge funds have positions in YUM; in fact, it recently was the top restaurant stock among hedge funds, with 37 hedge funds having a position. Donald Chiboucis’s Columbus Circle Investors got into the stock in the first quarter, buying up over 1.6 million shares (see more stock picks from Columbus Circle Investors). Billionaire Richard Chilton’s Chilton Investment Company cut its stake in YUM, but retained 800,000 shares (review the rest of Chilton's portfolio).
The company’s 10-Q from the first quarter of the year led with 13% revenue growth over the first quarter of 2011, and net income rose to $458 million from $264 million. Growth was powered by 34% revenue growth in China, including 14% growth in same-store sales, as U.S. revenue actually decreased. Operating profit did rise in the U.S. YUM also achieved growth in its general International segment, which includes the rest of the world less mainland China and the India region (which is a very small portion of the business). The recent results from Q2 (read a detailed analysis of YUM's earnings) were less positive, as the company beat estimates on revenues (again, stemming from growth in China) but failed to meet earnings.
So far this year YUM is up about 11%, which leads many of its peers as McDonalds, Domino’s (NYSE: DPZ), and Wendy’s (NASDAQ: WEN) are all down this year. YUM’s trailing price-to-earnings ratio is above 20, which is comparable to MCD’s at 17 and Domino’s at 20. Wendy’s is apparently expected to substantially grow its earnings over the next few years, with its trailing P/E hitting 90. On a forward basis, YUM continues to be in line with its peers: Its forward multiple of 17 is above the 15 shared by McDonalds and Domino’s but below the 23 that follows from Wendy’s high share price and modest analyst estimates.
It is hard to see a pure value case for YUM given its P/E and an EV/EBITDA ratio of nearly 12. Its growth case is also problematic as questions continue to be raised about the sustainability of macro growth in China, which now accounts for nearly half of YUM’s revenue. In addition, any rise in the U.S. dollar compared to international currencies would reduce overseas earnings in terms of dollars (of course, it is also possible that China will allow their own currency to rise against the dollar, which could benefit Yum if the currency gains offset any adverse effects on the Chinese economy). Finally, YUM pays a 1.8% dividend, which is about average for a restaurant stock. We recommend that investors look elsewhere for a good restaurant stock and wait for the share price to cool.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.