Is Yum! Brands a Bargain Here?

With shares of Yum! Brands (NYSE:YUM) trading at around $67.20, is YUM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Yum! Brands has 39,000 restaurants in 125 countries, and it shows no signs of stopping there. With strong brand names like KFC, Pizza Hut, and Taco Bell, international potential is still strong. However, the recent “poor chicken quality” drama in China was a setback. Yum! Brands relies heavily on China, which can be looked at as a positive or a negative. At this exact moment, it’s a negative because Yum! Brands must spend time and money on quality reassurance in China. Let’s take a look at some overall positives and negatives for Yum! Brands.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Positives:

  • Analysts like the stock: 12 Buy, 12 Hold, 1 Sell
  • Comps increased 2 percent in the U.S. (mostly thanks to Taco Bell)
  • Comps increased 1 percent for Yum! Restaurants International
  • Share repurchase program
  • Management confident in a rebound in 2014

Negatives:

  • Revenue declined 8 percent last quarter
  • Poor performance in China
  • Avian Flu in China
  • Comps declined 20 percent in China
  • Comps declined 3 percent in India
  • Expenses increased 7 percent
  • Management expects decline in earnings for 2013 due to weak sales

The most concerning negative above is India. The issues in China will eventually fade away. The weak performance in India is either due to a weak consumer or the brand isn’t strong enough. Either way, it’s a problem.

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Yum! Brands, Chipotle Mexican Grill (NYSE:CMG), and McDonald’s Corp. (NYSE:MCD). Yum! Brands has a market cap of $3.94 billion, Chipotle Mexican Grill has a market cap of $11.22 billion, and McDonald’s has a market cap of $101.22 billion.

YUM

CMG

MCD

Trailing   P/E

27.30

39.32

18.72

Forward   P/E

10.60

29.19

16.00

Profit   Margin

11.71%

10.36%

19.79%

ROE

76.06%

23.75%

36.82%

Operating   Cash Flow

$2.29 Billion

 $515.84 Million

 $6.97 Billion

Dividend   Yield

2.10%

N/A

3.10%

Short   Position

1.80%

15.60%

1.30%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal  

The debt-to-equity ratio for Yum! Brands is weaker than the industry average of 0.90, but it still qualifies as normal.

Debt-To-Equity

Cash

Long-Term Debt

YUM

1.27

$776.00 Million

$2.94 Billion

CMG

0.00

$507.50 Million

$0

MCD

0.89

$2.34 Billion

$13.63 Billion

 

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

T = Technicals Have Weakened    

Yum! Brands hasn’t performed well over the past year. There have been spikes, but none of them had traction. The 2.10 percent yield helps, but McDonald’s yields 3.10 percent and has offered stronger stock performance.

1 Month

Year-To-Date

1 Year

3 Year

YUM

-3.09%

2.24%

-5.12%

64.13%

CMG

14.13%

22.10%

-9.84%

154.00%

MCD

1.69%

15.37%

10.26%

55.72%

 

At $67.20, Yum! Brands is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

67.21

100-Day   SMA

66.65

200-Day   SMA

67.13

 

E = Earnings Have Been Strong                   

Earnings have consistently improved on an annual basis without any hiccups since 2009. This is somewhat rare as well as impressive. Revenue has improved for three consecutive years. This is also impressive, especially considering many companies throughout the broader market have seen revenue declines in 2012. For the record, neither Chipotle nor McDonald’s saw revenue declines in 2012.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

11.30

10.84

11.34

12.63

13.63

Diluted   EPS ($)

1.96

2.22

2.38

2.74

3.38

 

When we look at the last quarter on a year-over-year basis, we see a decline in revenue and earnings. The same can be said on a sequential basis.

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   millions

2.74

3.17

3.57

4.15

2.54

Diluted   EPS ($)

0.96

0.69

1.00

0.73

0.72

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

In China, the chicken issue at KFC combined with the bird flu has affected the entire industry, not just Yum! Brands. However, if the Chinese economy holds up, then a recovery is likely. The bigger long-term concern is the strength (or weakness) of the consumer. In regards to the United States and international operations excluding China and India, all systems are go.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Conclusion

Yum! Brands is a good company that still has a lot of potential going forward. Recent events might have presented an opportunity, but the bottom line is that the stock’s upward momentum has stalled and there are considerable headwinds. McDonald’s is stronger, and it offers a higher yield. McDonald’s also held up much better in 2008. Therefore, McDonald’s is still a better option than Yum! Brands.

Yum! Brands is a WAIT AND SEE.

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.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.