YUM Market Research & Analysis Report
Updated Nov 18, 2013

Growth and Balance Sheet

The company reported that it earned $152 million, or 34 cents basic earnings per share (33 cents diluted earnings per share), for the third quarter of 2013 ending September7. That's down from $471 million, or $1.02 basic earnings per share ($1.00 diluted earnings per share) for the same quarter last year. Excluding the non-cash special item charge of 52 cents, related to impairment of Little Sheep and US refranchising gains, the decrease in EPS was 15%  year on year. Revenues  for the  third  quarter were $3,466million, down from $3,569 million for the same quarter last year. China division same store sales declined 11%, and operating margin was down 190 basis points to 19.54%, primarily due to adverse publicity from the poultry supply incident and news of Avian flu. YUM restaurants international division same stores sales grew 1%, and operating margin was up by 10 basis points to 22.6%, primarily due to good results in emerging markets. US division was same stores sales were flat, and operating margi n was up by 330 basis points to 23.8%. India division same store sales were also flat, but there was 24% unit growth. YUM forecasted EPS for fourth quarter of 2013 are expected to be from 75 cents to 86 cents, compared to 73 cents for the fourth quarter of 2012. The financial strength indicators of the company are all at worse levels than the industry averages. The current ratio of the company is 0.92, and the industry average ratio is 1.34. The quick ratio of 0.77 is at worse levels than the average for the industry of 1.22.The interest coverage ratio of 19.03 is at much worse levels than the industry average of 85.22. In terms of efficiency, the inventory turnover ratio of 32.634 is at worse levels than the average for the industry of 43.65; however, the asset turnover ratio of 1.48 is at slightly better levels than the industry average of 1.43.

Valuation

YUM PE stands at 30.99 above the industry average of 29.21, and above the S&P 500 average of 18.85. The company is currently trading above the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 12.57x to 30.99x trailing 12-month earnings. YUM's current Price/Sales of 2.50 is above the average of its industry of 2.01.  YUM’s head to head comparison to its main competitors show that the company has the lowest gross margin, and lower than the industry average; however, the company’s operating margin is second highest in comparison to those of the competition, and well above the average for the industry. The quarterly revenue growth of the company is negative, and competition has managed to record positive growth rates. The stock trades at a higher P/E than all of the competition, and also at  one of the  highest  P/S ratio.  The company has the  highest  (worst) PEG ratio of  all the competitors, which shows that investors are expecting  lower  growth in company’s future earnings. The stock is currently trading below its intrinsic value of $86.13, this suggests that the stock is currently undervalued at these levels. The beta of 0.45 implies lower volatility of the stock with respect to the S&P 500.  YUM has shown favorable earnings consistency over the last five years. Moreover, YUM’s earnings per share over the last five years have  grown  by  15.00%.  The current quarter earnings in comparison  to the same quarter last year  have  declined  by  67%.  The company  Total Debt to Equity of 127.48 is well above the required maximum, and it is above the industry average of 53.65. YUM’s current price levels are below the maximum level, 2.38% below the 52 week high of $75.13, and the technical indicators are neutral to positive. The majority of the analyst ratings are hold.  YUM has a dividend payout ratio of 57%.

About YUM

Yum! Brands, Inc. (YUM) is a quick service restaurant company based on number of system units, with approximately 37,000 units in more than 120 countries and territories. The Company through its three concepts of KFC, Pizza Hut and Taco Bell (the Concepts), develops, operates, franchises and licenses a worldwide system of restaurants, which prepare, package and sell a menu of priced food items. Units are operated by a Concept or by independent franchisees or licensees under the terms of franchise or license agreements. In addition,  YUM owns non-controlling interests in Chinese entities who operate in a manner similar to KFC franchisees, as well as a non-controlling interest in Little Sheep Group Limited (Little Sheep). It operates in five segments: YUM Restaurants China, YUM Restaur ants International, Taco Bell U.S., KFC U.S. and Pizza Hut U.S. In December 2011, it sold the Long John Silver's and A&W All-American Food Restaurants brands. On February 1, 2012, it acquired Little Sheep.

Competitor Comparison

Yum! Brands, Inc. (NYSE:YUM) N.V.

Highlights

YUM! Brands, Inc., together with its subsidiaries, operates quick service restaurants in the United States and internationally. The stock closed yesterday’s trading session at $73.34. In the past year, the stock has hit a 52-week low of $59.68 and 52-week high of $75.13. The intrinsic value of the stock is above the current price.  YUM has a market cap of $32.95 billion and is part of the Services sector.  

• Strong leadership program providing consistency 
• Strong brand and position worldwide
• Spread across wide geographical region

• Declining domestic market share 
• Lack of innovation 

YUM Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors 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 $75.13, current price is $73.34, is 2.38% below the 52 week high.

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 30.99 the  average industry P/E ratio is 29.21 and is above the S&P 500 P/E ratio of 18.85.

When there is strong insider ownership which we define as 8% 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  4.69% of YUM stock. Management's representation is  not  large enough. This does  not  satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

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  is trading in the range of $64.08  -  $73.99  in the past 30 days. The stock has been showing support around the level of $64 and resistance in the $74 range. The stock is trading above the 50-Day Moving Average and above the 200-Day Moving Average. The RSI(14) is  71.05. As can  be seen from the graph on page 1,  after trading sideways from December to  February the stock took off and reached to the resistance level of around $74, previously hit in April and November 2012  (blue line).Since then, the stock gapped down two time and was on a bearish course. When it hit the support level of $64, YUM one again set sails to the resistance level of  $74. Will the stock be able to currently break this unbroken resistance level  is yet to be seen?  However, on the weekly chart we have a pattern of three white soldiers, which give us to think that this might be it. If broken the price may go to new heights, if not we may again see the pattern of returning to $64 or even $60. Our indicators give aneutral to positive view of YUM.

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

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 4 Buy, 5 Outperform, and 15 Hold.

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 for the last 5 years were 1.96, 2.22, 2.38, 2.74, and 3.38this type of earnings action is very favorable.

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 127.48 isabove the required maximum, and it is above the industry average of 53.65.

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 comparable EPS growth for this quarter relative to the same quarter a year earlier is -67.00%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%.  YUM’s annual earnings growth rate over the past five years is 15.00%, above the target growth rate.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.