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.
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 2014Negatives:
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 salesThe 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 |
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 | Top 5 Heal Care Companies To Own For 201411.30 | 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.
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.
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