Does Yum! Brands, Inc. (YUM)’s Rebound Indicate a Buying Opportunity? – McDonald’s Corporation (MCD), Chipotle Mexican Grill, Inc. (CMG)

In January, Yum! Brands, Inc. (NYSE:YUM) has been faced with several glitches in the Chinese market. Because of the overall economic slowdown in China and the chicken food safety issue, YUM had predicted that the same store sales would drop by 25% in the first quarter. However, YUM has recently announced that the bad news might not be as bad as expected. The same store sales in the first quarter declined by only 20%, lower than a previously estimate decrease of 25%. In addition, the same store sales growth has rebounded by 2% in February.

Peer comparison

At nearly $68 per share, Yum! Brands, Inc. (NYSE:YUM) is worth around $30.6 billion on the market. The market values YUM at around 11.4 times EV/EBITDA. Compared to other quick service restaurants including McDonald’s Corporation (NYSE:MCD) and Chipotle Mexican Grill, Inc. (NYSE:CMG), it doesn’t seem to have a cheap valuation at its current price. McDonald’s is the biggest company among the three, with more than $99 billion in total market cap. At around $98 per share, McDonald’s Corporation (NYSE:MCD) is valued a bit cheaper at 11.2 times EV/EBITDA. Chipotle Mexican Grill, with $10 billion in total market cap, is the smallest company. It is trading at around $322 per share. The market gives this company the most expensive valuation at 17.46 times EV/EBITDA.

Among the three, McDonald’s Corporation (NYSE:MCD) is the most profitable company, generating more than a 30.3% operating margin while the operating margin of Chipotle Mexican Grill, Inc. (NYSE:CMG) stays around only 16.9%. YUM has the lowest operating margin at only 16.34%. Income investors might like McDonald’s the best because it pays the highest dividend yield at 3%, YUM’s dividend yield is 1.8% while Chipotle Mexican Grill, Inc. (NYSE:CMG) doesn’t pay any dividends.

My Foolish take

If any investors would like to “surf” the potential growth in the quick service restaurant business in China, YUM is stock to buy. The EV multiple of 11.4 is not considered high for the company that has grown its EBITDA at a 10.9% annualized rate for the past ten years. However, I prefer McDonald’s Corporation (NYSE:MCD) due to its highest dividend yield, the highest operating margin and the lowest valuation.

The article Does YUM’s Rebound Indicate a Buying Opportunity? originally appeared on Fool.com and is written by Anh HOANG.

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