Digging into YUM

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a great way to gain a detailed and thorough perspective on a company and its future. As the 2013 year rollercoaster journey begins, I would like to pinpoint on a trailblazer in the quick service restaurant industry, Yum! Brands (NYSE: YUM).

Strengths:

  • Dividend: At the moment, Yum Brands pays out quarterly dividends of $0.34, which annualized puts the dividend as yielding 1.96%
  • Institutional Vote of Confidence: 78% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Relative Lack of Volatility: Yum Brands currently carries a beta ratio of 0.87, which represents a stock which trades with less volatility than the overall market, a major upside for long-term investors
  • Accelerated Revenue Growth: In 2006, Yum Brands reported revenue of $9.56 billion; in 2011, the company announced revenue of $12.63 billion, representing year over year annual growth of 5.73%, and this trend of single digit solid revenue growth is highly anticipated to sustain into the future, with projections placing 2016 revenue at $20.85 billion (this growth has been a result of expansion by the company in store count, especially in emerging markets such as India and China)  
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  • Double Digit Margins: The company presently carries a net profit margin of 10.45%, representing a strong and profitable company primed for growth into the future
  • Cash & Equivalents: Yum Brands currently possesses $942 million of cash and cash equivalents on their balance sheets, a major upside to the business
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Weaknesses:

  • Pricy Valuation: Yum Brands currently carries a price to earnings ratio of 20.12, a price to book ratio of 17.24, and a price to sales ratio of 2.44, all of which indicate a company trading with a pricy valuation
  • Debt: The company currently holds about $3.00 billion of debt on their balance sheets, a major downside to the business
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  • Concentration in United States: According to the company’s 2011 annual report, there are 58 restaurants for every 1 million people in the United States, opposed to only 2 restaurants for every 1 million people in emerging markets, revealing a huge concentration of business in the United States, which could prove to be a weakness in the future

Opportunities:

  • Acquisitions: On February 1, 2012, Yum Brands acquired Little Sheep, and further acquisitions in the future could fuel overall company growth
  • Product Innovation: Yum Brands has consistently innovated its offerings to spark customer excitement and fuel sales growth, and further growth in any one of Yum Brands major chains could prove to be a major opportunity for the company
  • Emerging Markets: In 2011, Yum Brands open 656 new restaurants in China and 101 new restaurants in India, and further expansion into these fast-growing emerging markets could provide huge opportunity for the company and its shareholders
  • Dividend Growth: Since implementing their dividend program in 2004, Yum Brands has consistently raised their dividend payouts, and further dividend growth in the future should reward shareholders
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Threats:

  • Competition: The fast food restaurant industry is one of the most competitive in the world, and the competition to offer the best product for the least amount of money can lead to margin compression
  • Rising Input Prices: Yum Brands’ main chains, Taco Bell, Pizza Hut, and KFC, all pride themselves on offering good value to the customer, and if food prices were to rise due to the historic drought in the United States in 2012 or any other occurrences, the company would be faced with the difficult decision of passing the extra costs onto their customers or swallowing the pain in their margins
  • Stagnant Economic Landscape: While the company’s fast food offerings are cheaper than other higher end eating alternatives, in times of economic downfall people are less willing to spend money, and any stagnation in the global economic landscape could harm Yum Brands

Competition:

Major publicly traded competitors of Yum Brands include Domino’s Pizza (NYSE: DPZ), McDonald’s (NYSE: MCD), Jack-in-the-Box (NASDAQ: JACK), and Arcos Dorados Holding (NYSE: ARCO). All of these companies operate in the fast food restaurant industry, and compete with Yum Brands’ restaurant chains. Domino’s is valued at $2.57 billion, does not pay out a dividend, and carries a price to earnings ratio of 25.37. McDonald’s is valued at $90.21 billion, pays out a dividend yielding 3.43%, and carries a price to earnings ratio of 16.92. Jack-in-the-Box is valued at $1.25 billion, does not pay out a dividend, and carries a price to earnings ratio of 20.76. Finally, Arcos Dorados is valued at $2.87 billion, pays out a dividend yielding 1.74%, and carries a price to earnings ratio of 24.72.     

The Foolish Bottom Line:

Financially, Yum Brands is relatively solid. The company possesses solid revenue growth, a growing dividend, and a business model which is able to produce double-digit margins. However, the company carries a substantial debt load which outweighs its pile of cash. The company’s future is very reliant on growth stemming from emerging markets such as China and India, and lately this growth has been threatened because of economic downfall in these regions, especially China. However, in the long run Yum Brands is perfectly positioned to take advantage of these emerging markets and prosper into the future providing shareholders with handsome returns over the coming decades.


makinmoney2424 owns shares of McDonald's. The Motley Fool recommends McDonald's. The Motley Fool owns shares of Arcos Dorados and McDonald's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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