This Fast Food Chain is in for a Difficult Year: Yum! Brands, Inc. (YUM), McDonald’s Corporation (MCD)

Yum! Brands’ current valuations also show that it is trading at a premium, and with increased competition and a contracting foot hold in China that growth may further decline.

Chipotle, on the other hand, is a growth company and it looks to be fairly priced at an EV/EBITDA of 17 times and a forward P/E ratio of over 30 times. Its margins have been reduced recently because of the rising costs of production and expansion policy. The company has opened 123 new stores in the first three quarters this year and has more stores in the pipeline. Chipotle’s high prices on the menu card, which it plans to increase further, and its customer loyalty should widen its margins again.  Furthermore, its catering business has a potential to add more than $200 million to the company’s revenue.

Final words

Yum! Brands has an amazing track record of success, but its current situation has forced the company to lower its guidance for 2013. The top line will remain affected in the next few quarters as the company will take time to rebuild its image in China again. The company is saturated in the U.S. market too, which is evident from the fact it is closing stores in that region. I believe that the company does not have the required growth to support its valuation, and I would be wary in creating long-position in this stock.

The article This Fast Food Chain is in for a Difficult Year originally appeared on Fool.com and is written by tarun bachhawat.

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