Can Yum! Brands Outperform in both China and the U.S.?

With shares of Yum! Brands, Inc. (NYSE:YUM) trading around $64.72, is YUM an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalysts for the Stock’s MovementKFC

In December, news circulated that KFC was supplied chicken that contained excessive amounts of antibiotics. The Shanghai Food and Drug Administration has been mulling tough food safety laws and has promised to crack down on suppliers and distributors that don’t meet strict standards. The company is cooperating with officials while an investigation is launched into its suppliers and its compliance with safety regulations.

It’s worth noting that the antibiotics were found in a very small percentage of KFC products.

Catalysts are critical to discovering winning stocks. Check out our newest CHEAT SHEET stock picks now.

In a statement released at the end of November, chairman and CEO David Novak commented: “For the fourth quarter, stronger than expected operating performance from Yum! Restaurants International and our U.S. division is offsetting softer sales in China, where we no longer expect same-store sales to be negative as we overlap 21% same-store sales growth from last year.”

Fourth-quarter same-store sales are expected to be +4 percent at YRI, +3 percent in the U.S., and -4 percent in China.

He added, “We are extremely confident Yum! China remains the best growth story in the restaurant industry.”

T = Technicals on the Stock Chart are Good, but not Great

As of December 26, shares of Yum! Brands were 4.27 percent below their 20-day simple moving average, or SMA; 7.24 percent below their 50-day SMA; and 3.99 percent below their 200-day SMA.

Since the beginning of 2012, the stock price has been in an upward trend, climbing 11.05 percent this year to date, and climbing 9.68 percent year over year.

Yum! Brands, Inc. Stock Chart

As a benchmark, the S&P 500 has climbed 11.98 percent this year to date and climbed 12.2 percent year over year, modestly beating Yum! Brands by 0.93 and 2.52 percentage points respectively.

For comparison, shares of McDonald’s Corp. (NYSE:MCD) have come down 10.22 percent, shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) have come down 15.31 percent, and shares of Darden Restaurants, Inc. (NYSE:DRI) have come down 0.29 percent this year to date.

It’s worth pointing out that shares of Yum! Brands fell 9.92 percent on November 29 after the company announced full-year 2012 and 2013 EPS targets that were slightly off the mark.

Full-year 2012 EPS growth was forecast at 13 percent, or $3.24 per share, excluding special items. This was just two cents shy of the average analyst estimate of $3.26 per share, and four cents shy of I/B/E/S estimates.

Yum! Brands “expects to once again deliver at least 10% EPS growth in 2013, excluding Special Items, which would mark twelve consecutive years of meeting or exceeding this annual EPS growth target,” or earnings of about $3.58 per share. On average, analysts are estimating EPS of $3.68, or $3.74 according to I/B/E/S.

E = Earnings Growth is Very Strong

Not many companies can boast 12 consecutive years of double-digit EPS growth, minus special items. Keep in mind that the company’s boast was for EPS growth before special items, which knocked 15 cents off 2010 EPS.

 FY: Jan. – Dec. 2007 2008 2009 2010 2011
Revenue ($) in millions 10,416 11,279 10,836 11,343 12,626
Change +8.29% -3.93% +4.68% +11.31%
Diluted EPS ($) 1.68 1.96 2.22 2.38 2.74
Change +16.85% +12.94% +7.46% +15.09%

 

Revenues did drop slightly in 2009, a forgivable blemish given the financial crisis. For a quick comparison, McDonald’s revenues fell 3.31 percent in the same year, but Chipotle Mexican Grill still posted a 14 percent gain (although, this represented an 8.67 percentage-point drop from 2008)…

The first quarter in 2012 immediately begs for attention. Revenues fell over 33 percent led by slow sales in the U.S., but grew 13.1 percent year over year. EPS was helped by strong margin growth, but most-heavily influenced by special items, which added 20 cents.

Aug. 31, 2011 Dec. 31, 2011 Mar. 31, 2012 Jun. 30, 2012 Aug. 31, 2012
Revenue ($) in millions 3,274 4,111 2,743 3,168 3,569
Change +25.57% -33.28% +15.49% +12.66%
Diluted EPS ($) 0.80 0.74 0.96 0.69 1.00
Change -7.05% +29.46% -27.58% +43.80%

 

The third quarter was obviously strong. Highlights include an 18 percent increase in worldwide operating profit, prior to foreign currency exchange, led by 22 percent growth in China. Worldwide restaurant margin increased 1.9 percentage points to 18.9 percent. Same-store sales grew 6 percent in both China and the U.S.

Conclusion

Yum! Brands is trading at a trailing twelve months price-to-earnings ratio of 19.25, and a price-to-book ratio of 13.38 for the most recent quarter. For comparison, McDonald’s is trading at a trailing twelve months price-to-earnings ratio of 16.71, and a price-to-book ratio of 6.42 for the most recent quarter. Yum! Brands may be more expensive, but its performance has been stronger.

For dividend hunters, Yum! Brands has increased its dividend by a double-digit percentage rate for eight consecutive years, with an 18 percent boost in the third-quarter of 2012. The forward annual dividend yield is 2.10 percent, for a yield of $1.34. In November, the board authorized $1 billion in common-stock repurchases through May 2014. The company’s commitment to shareholder value is definitely attractive.

Because of this, and the metrics mentioned above, Yum! Brands looks like it will OUTPERFORM its competitors in the long term, despite some softness in the fourth quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.