December 15, 2008
Ticker: YUM
So have you heard about Yum! Brands? No? You would be wrong if you have heard about any one of these - KFC, Pizza Hut, Taco Bell, Long John Silver’s, or A&W All-American Food Restaurants. The company operates all of these restaurant brands. Not everyone realizes that all of these chains are controlled by a company spun off from Pepsi over 11 years ago.
Yum! Brands – a Fortune 500 company - operates as a quick service restaurant company. It develops, operates, franchises, and licenses a system of restaurants, which prepare, package, and sell various priced food items. Its restaurants specialize in chicken, pizza, Mexican-style food, and quick-service seafood categories. The company operates over 35,000 restaurants in 100 countries and territories (For comparison, McDonald's (MCD) has over 31,000-plus restaurants, and Burger King (BKC) over 11,000). Founded in 1997 - it was formerly known as TRICON Global Restaurants and changed its name in 2002.
In the News
Recently the company unveiled its plans for the year 2009 – based on hopes that record international store expansion and a revitalized KFC brand in the United States can help overcome tighter consumer spending worldwide and unfavorable exchange rates in 2009.
The company outlined a number of initiatives to help reach an earnings growth of at least 10 percent next year, including - Adding 500 KFC stores in China, Trimming $60 million in operating costs by restructuring its U.S. business, Refranchising 500 locations toward its overall goal of reducing U.S. company ownership to below 10 percent in 2010 from 18 percent currently, Expanding the existing menu for Pizza Hut and KFC, and Promoting a national value menu at KFC.
The company also expects to save about $70 million next year due to its recent corporate restructuring that included a round of layoffs – eliminating several hundred jobs - at the company's headquarters in Louisville, KY.
Expected Profit Growth in 2009 – 15 to 20%
Reuters reported that Yum! Brands expects to report a profit growth of 15-20% in China in 2009. According to Rick Carucci – the company's CFO - it can achieve this figure even without unusually strong sales at established restaurants. In 2009, the company intends to build 500 restaurants in China. Yum! Brands expects sales growth at established China stores to slow down to an increase of 8% in 2008, compared to a rise of 12% in 2007. For 2009, the company is forecasting same-store sales growth of 5% for China.
Analysts Agree
Larry Miller, a restaurant analyst with RBC Capital Markets said "Overall, we're
more confident Yum can meet its 10 percent EPS growth target". John Ivankoe, an analyst with J.P. Morgan also agreed with Yum's prediction of a minimum of 10% EPS growth.
Not to miss, Jim Cramer has been very positive on this stock and last month hosted the company’s CEO - Doug Novak – on CNBC’s Mad Money – who pointed out that the stock was trading at only 14-times earnings.
Healthy Dividends
The company has regularly been paying quarterly dividends since 2004 – and the dividend amount has quadrupled since then. The current dividend yield for the company is at 2.7%. The company has an excellent history of rewarding shareholders with higher income through its share repurchase program and its quarterly dividend. It is a leader among global consumer companies in this key measure.
In 2007, the company returned almost $1.7 billion to shareholders, including over $1.4 billion in share repurchases and nearly $275 million in dividends. As of September 2008, Yum has already returned over $1.8 billion to shareholders this year through $1.5 billion of share repurchases and over $300 million in dividends.
Earnings
Q3 2008 Actual (USD) 0.58 - Estimates (USD) 0.54 - Surprise 7.41%
Q2 2008 Actual (USD) 0.45 - Estimates (USD) 0.42 - Surprise 7.91%
Q1 2008 Actual (USD) 0.42 - Estimates (USD) 0.39 - Surprise 6.06%
The company has exceeded analysts' earnings expectations in 17 out of the past 20 quarters (the last miss being in 2005). The EPS estimate for Q4 2008 is as $0.45. The cash flow appears to be healthy as well - YUM reported Q3 2008 Cash flow per share of $1.08 on 10/7/08.
Fundamentals
YUM's P/E Ratio @ 14.14 is comparable to other companies in the Restaurants industry. The PEG value is at 1.1939 - above the restaurants industry median PEG of 0.88. However, based on analyst ratings the company stands out in 3 important rankings – Liquidity, Profitability and Growth.
YUM's Gross Margin @ 24.83% is comparable with the restaurant industry. The Operating Margin @ 13.30% is better than 91% of its peers – a clear indicator that the management exercises a strong and effective control over costs and expenses – a trend that is expected to continue in 2009 based on the steps that have been taken in 2008.
YUM's Return on Equity @ 110.85% (NOT a misprint) is the BEST in the industry indicating its strong ability to reinvest its earnings efficiently. Also, YUM's EPS Growth Rate @ 18.7% is better than 68% of its peers.
Analyst Ratings
Reuters Company Research Performance Rating: Outperform.
Jaywalk Consensus: YUM's consensus score is higher than 94.3% of the Restaurants Industry; higher than 91.2% of the Services Sector; higher than 90.4% of the Jaywalk Universe.
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