These 3 Numbers Say Yum! Brands, Inc. (YUM) Is Overvalued

3 Problems
The first issue is, the company’s operating margin is lower than any of its peers. In the current quarter, McDonald’s led the way with an operating margin of 31.98%. Starbucks and Chipotle reported operating margins of 16.6% and 14.62%, respectively. By comparison, YUM Brands’ operating margin was just 12.16%. If YUM Brands isn’t able to improve its operating margin going forward, even better sales growth won’t mean as much in terms of earnings growth.

The second issue is with YUM Brands‘ balance sheet. In the restaurant industry, one constant risk is taking on too much debt. While I’m not suggesting that the company is in trouble, the difference between their balance sheet and the competition can’t be ignored. Using the debt-to-equity ratio, YUM Brands has the highest level of debt-to-equity at 1.30. McDonald’s has a stronger balance sheet at 0.92, and Starbucks and Chipotle are in a different league with debt-to-equity ratios of 0.11 and 0, respectively.

Last but not least, YUM Brands seems overvalued if you look at their earnings and dividend, relative to their projected P/E ratio. If we use the PEG+Y ratio to compare YUM Brands to their peers, the stock seems expensive. The PEG+Y ratio is like an inverted PEG ratio. You take the company’s expected growth rate, add the current yield, and divide by the P/E ratio. This helps investors compare companies that pay dividends by taking this yield into account.

With a PEG+Y ratio, the higher the number the better. A company with a low ratio is relatively more expensive. YUM Brand’s (NYSE:YUM) PEG+Y ratio is 0.67. By comparison, only Chipotle has a lower ratio at 0.66. Relatively speaking, McDonald’s at 0.75 or Starbucks at 0.80 look like much better values.

The challenge for YUM Brands is predicting what their earnings growth will be. Just a month ago, analysts thought EPS would grow by over 14%, today that number is down to 12%. If the problems in China persist longer than the company anticipates, the number could drop even further. For a stock selling for over 21 times 2013 full year estimates, investors are ignoring the obvious. YUM Brands seems overvalued.

The article These 3 Numbers Say This Stock Is Overvalued originally appeared on Fool.com and is written by Chad Henage.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.