Is This Company’s Stock Truly Yummy?

By Ryan Guenette - September 13, 2012 | Tickers: BKW, DPZ, MCD, PZZA, YUM | 0 Comments

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Yum! Brands (NYSE: YUM) is a quick service restaurant company that derives its revenue from its vast portfolio of brands, which includes KFC, Pizza Hut, and Taco Bell. The company possesses approximately 37,000 units in more than 120 countries. Yum develops, operates, franchises, and licenses a worldwide system of restaurants that are among the most recognized in the world. Yum Brands employs 466,000, and is valued at $29.05 billion. Over the past year the company’s stock has rallied 20.75%, slightly outperforming the S&P 500, which rallied 19.32% over this same time period. So is this company’s stock truly yummy?

Hearty Fundamentals

In 2002, Yum Brands reported earnings per share of $1.98. In 2012, the average analyst consensus believes the company will derive $3.43 per share from its business operations. This represents a 73.23% increase in earnings over the course of a decade. Based on these statistics, the company’s compound annual growth rate (CAGR) is 5.65%, sustainable and decently paced rate. Analyst estimates display Yum Brands growing its earnings at a middle single digit rate into the coming years. This rate is ideal for the long-term investor, opposed to the investor with the short-to-intermediate horizon. During this past decade Yum Brands’ sales have grown relatively at the same pace, displaying a company that is maintaining the margins and integrity of its business. Additionally, the company pays out a decent sized dividend that matches the current inflation rate. Currently, the company pays out quarterly dividends of $0.28, or an annual dividend of $1.12, which at the current price, puts the dividend as yielding 1.79%. This is up from 2011’s annual dividend of $1.00, and is further expected to expand into the future. By 2014, the street anticipates the company to dole out an annual dividend of $1.52, which at current prices, would put the dividend as yielding 2.38%. From this we can see the incredible financial strength Yum Brands’ underlying business possesses, as well as the decent dividend the company pays out to its shareholders.  

The chart below displays Yum! Brands’ sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

Courtesy of Zonebourse.com

Serving The Future’s Customers

Yum Brands is a relatively established brand in the United States. Chances are a customer does not have to venture far and wide in search of one of their branded restaurants. According to the company’s annual report for 2011, there are 58 restaurants per 1,000,000 people in the United States. So it is of no surprise that Yum Brand’s United States operations are focused on improving current restaurants, and streamlining the businesses to improve margins. The company’s statement regarding United States operations on their annual report stated, “Dramatically improve U.S. brand positions, consistency, and returns.”

However when sights are set on emerging markets, one may have to travel far and wide to run into one of Yum Brands' branded restaurants. In emerging markets, there are 2 restaurants per 1,000,000 people. So it is again of no surprise that Yum Brands is investing heavily in expanding in these emerging markets. Just in 2011, Yum Brands opened 101 new restaurants in India, and 656 new restaurants in China. By the end of 2012, they expected to have restaurants in 20 African countries. Regarding emerging markets, the company stated, “Drive aggressive international expansion and build strong brands everywhere.”

The company’s growth is going to be driven from international expansion into emerging markets, yet the recent slowdown in China has led investors to slightly lose faith in Yum Brands prospects. However China is still growing at an accelerated pace, and should rebound quickly, as recent reports have suggested a form of stimulus being injected into the economy. However China is very much an export driven economy, and with the European Union and the United States importing less, China may find itself staggering.

The chart below displays Yum Brands worldwide system units breakdown over the past years.

Courtesy of Zum! Brands 2011 Annual Report     

Who Serves the Best Food?

Compared to some of Yum Brands’ most prominent competitors, such as: McDonald’s (NYSE: MCD), Domino’s Pizza (NYSE: DPZ), Burger King Worldwide (NYSE: BKW), and Papa John’s International (NASDAQ: PZZA), Yum Brand compares relatively favorably.

In terms of growth Yum Brand is the industry leader, while McDonald’s is the industry laggard. McDonald’s and Yum Brands are the only companies in the industry that pay out dividends, with McDonald’s possessing the largest dividend, and Yum Brands possessing the fastest growing dividend. In the fundamental ratio comparison, McDonald’s is the industry bargain, while Burger King trades at a premium to its peers. The opposite is true when growth is taken into account. In the net profit margin comparison, McDonald’s stands out to the upside, while Burger King stands out the downside. In conclusion, McDonald’s and Yum Brands appear to be the two strongest companies, while the rest are below par

The Foolish Bottom Line

Yum Brands has recently been tripped up because of investors’ fears that without explosive growth derived from China, their growth will be weighted down by stagnant American and European markets. However the company still maintains incredible expansion plans that would drive extensive growth in the company’s top line. The company possesses tremendous financial strength, and should continue to expand into the future at an annualized mid-single digit rate. The company dividend factors out inflation, and compared to its peers Yum Brands compares relatively favorably. To an investor with a long-term horizon, Yum Brands’ stock is mouth-watering, however short-term volatility is almost a certainty.     

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