Is YUM! Brands a “Yummy” stock?

Is YUM! Brands a “Yummy” stock?

Yum! Brands, Inc. (NYSE: YUM)            11/1/2012                            Last Price: $72.82

VIEW:  START BUYING

With almost 38,000 units in more than 120 countries, Yum Brands operates the largest quick-service restaurant system in the world based on number of units. It generates revenue through company-owned restaurants, franchise fees, and licensing arrangements. Concepts include KFC (17,400 units), Pizza Hut (12,100), and Taco Bell (5,500). Yum generated approximately $41 billion in system sales in 2011 (44% U.S., 40% international, 16% China)

Sector: Services                                                                                                 Industry: Restaurants

Highlights:

Yum Brands is the world’s largest fast food restaurant company in terms of system units. The stock closed yesterday’s trading session at $72.82. In the past year, the stock has hit a 52-week low of $52.54 and 52-week high of $74.44. Technical indicators for the stock are bullish for the short term and the company’s near future outlook is promising.

GROWTH AND BALANCE SHEET

Yum Brands is the parent company of the KFC, Taco Bell and Pizza Hut restaurant chains. Over three-quarters of the restaurant locations are franchises while the remaining quarter is company owned. Yum Brands has revenue of US$13.59 billion and is still seeing a growth rate, even at 3%.  China made up 55% of group sales during the third quarter and 50.2 percent of group revenues. The total Debt/Equity of 137.75% is rather high but acceptable for the industry. The company increased its full-year EPS guidance from 10% growth to at least 13%. YUM reported that profit margins increased by 0.1 percentage points to 21.4 percent despite wage inflation of eight percent and a two percent increase in commodity prices.

VALUATION

Yum Brands’ overseas expansion in emerging economies is a key driver of growth. The company announced an 18% increase in its quarterly dividend in September this year, seeing its stock continue to rise into October and reach an overall return of 29.74% for the entire past 52 weeks. YUM has a PEG ratio of 1.61, above the industry average. The P/E of 21.26 appears expensive and above the industry average. The stock is currently trading above its fair value of $70. The beta of 0.72 implies low volatility of the stock with respect to the S&P 500. The company will spend $100 million in four to five years to expand in India, including the addition of 100 outlets in the country this year.

RECOMMENDATION for next 6 months: We initiate our coverage with START BUYING. The company has demonstrated a pattern of bullish technical signs, the earnings performance and future international expansion offers a positive feeling. Shares are up 22.52% year to date as of the close of trading yesterday. Our overall score for YUM is 6.08

For trading we suggest:

• Buy the January 13  call with a strike of 77.50 priced at $1.01 per contract
• Sell the January 13   call with a strike of 80 priced at $0.52 per contract
• Net Debit to start: $0.49
• Maximum risk: Net debit

NEWS and CALENDAR

12/06/2012 09:00 am      Analyst and Investor Meeting

Thursday November 1, 2012 – Investors cry foul over privatising KFC franchisees in Malaysia

Wednesday October 10, 2012 – Yum Plans to Spend $100 Million in India to Expand Restaurants

YUM Strengths

• Strong Reputation
• Loyal Customer base
• International diversification
• Stays Open Late

YUM Weakness

• Farmers Rasing Prices
• Competition
• Internal Conflicts With Employees
• Health concerns,
• Foreign Currency Exposure

Competitor Comparison    YUMMCDIndustryMarket Cap:32.67B87.22B474.51MEmployees:60,584206.00KQtrly Rev Growth0.09-0.000.08Revenue13.59B27.44B407.48MGross Margin0.270.390.31EBITDA2.84B9.77B48.50MOperating Margin0.160.300.09Net Income1.62B5.45BN/AEPS3.405.310.39P/E21.2616.2920.21PEG (5 yr expected):1.611.861.20P/S2.333.191.15

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic value of the stock

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

YUM’s intrinsic value is $70.00 the current price is $72.27, the stock trades above its fair value.

Financials

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Sentiment

Investor’s sentiment for the stock

Analyst ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

We are searching for EPS numbers that are better than the previous year’s. One dip is allowed, but the following year’s earnings should be higher than the previous year. YUM’s annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.68, 1.96, 2.22, 2.38, 2.74, this type of earnings action is favorable.

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry

YUM’s Total Debt/Equity of 137.75% is not acceptable the industry average debt/equity is 144%

EPS This Quarter VS Same Quarter Last Year

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a “good” growth company. Stocks with improving earnings are worthy of your extra attention.

YUM’s EPS growth for this quarter relative to the same quarter a year earlier is 25.00% well above our target.

Annual Earnings Growth

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%.

YUM annual earnings growth rate over the past five years is 13.42%, above our target growth rate.

Current Price Level

Traders should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

YUM’s 52 week high is $74.44 current price is $72.37, is only 3% below the 52 week high.

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.

The company has a P/E ratio of 21.26 the average industry P/E ratio is 20.21 and is also above the S&P 500 P/E ratio of 16.30

Insider Ownership

When there is strong insider ownership which we define as 12% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own 0.51% of YUM stock. Management’s representation is not large enough. This does not satisfy the minimum requirement; companies that pass this test are more attractive to our valuation model.

Technical Analysis

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

Yum Brands stock has been showing support around $65.47 and resistance in the $67.83 range. Our indicators give Bullish signals for the short term and for the intermediate term on YUM. The prices have formed bullish MACD Crossover signal, and the Commodity Channel Index is Bullish.