Over the past twelve months, Yum! Brands, Inc. (NYSE:YUM), a famous quick service restaurant company, has not delivered a good return for its shareholders. While the S&P 500 has risen by 13.5%, YUM gained only 1.36% since March 2012. In the period of Dec. 17 to Dec. 21, YUM’s share price dropped as much as 8% after a food-safety scandal in China. However, YUM is gaining back its momentum when it rose by 7.5% after hours trading due to a better February same-store sales in China, its top market. Should investors get excited about YUM’s rebound? Or should we wait for more growth signal before investing into YUM? Let’s find out.
YUM relies on China
Yum! Brands, Inc. (NYSE:YUM) is considered one of the world’s largest quick service restaurant companies, with more than 39,000 units in more than 125 countries, operating under three main concepts: KFC, Pizza Hut and Taco Bell. KFC offers fried and non-fried chicken products including chicken wings, chicken strips and sandwiches while Pizza Hut specializes in selling ready-to-eat pizza products, and Taco Bell serves Mexican-style food products including tacos, burritos and quesadillas. In 2012, YUM reported that it had nearly 18,200 KFC units, 14,357 Pizza Hut units and nearly 6,000 Taco Bell units globally.
Yum! Brands, Inc. (NYSE:YUM) has four main reporting business segments: YUM China (China Division), YUM Restaurants International (YRI), United States and YUM Restaurants India (India Division). The majority of its revenue in 2012, $6.9 billion, or 50.6% of the total 2012 revenue, was generated from the China Division. The United States segment ranked second, with $3.35 billion in revenue, while the YRI segment contributed $3.28 billion in sales. The majority of YUM’s operating profit, more than $1 billion, derived from China Division, while the YRI segment generated around $715 million in operating profit. The United States ranked third with $666 million in 2012 operating profit. Among the four segments, the YRI segment enjoyed the highest operating margin of 21.8% while the China Division generated the lowest margin of 14.7%, and the U.S. segment had nearly 19.9% operating margin.
A cash-generating machine with short-term missteps
In the past five years, Yum! Brands, Inc. (NYSE:YUM) has experienced significant growth in its top line, bottom line and cash flow. The revenue has increased from $11.28 billion in 2008 to $13.63 billion in 2012, whereas the net income has grown from $964 million to nearly $1.6 billion during the same period. Furthermore, YUM could be considered a great cash-generating machine. Its free cash flow has consistently risen from $551 million in 2008 to nearly $1.2 billion in 2012.
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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