Yum! Brands, Inc. (YUM): Time to Buy This Restaurant Chain

Poultry issues in China, a horse-meat scandal in Europe, and an avian flu outbreak have been the core reasons behind a lackluster year (2013) for Yum! Brands, Inc. (NYSE:YUM). However, the recent earnings release by Yum! depicts that the worst is behind the company. Yum! reported a June sales decline of 12.2% less than the analysts’ estimates, showing that the fast-food giant is slowly and steadily heading in the right direction. But the big question remains the same: When will the company start to mint significant profits once again?

Yum! Brands earnings

In the second quarter, Yum! Brands, Inc. (NYSE:YUM) posted a 10% decline in its June sales – a far smaller drop than in May. The company’s most important unit, China, would report its June sales in the third quarter. In the month of May, Yum!’s sales in China fell by 19%. KFC’s same store sales in China were down 13% in June versus 25% in May and 36% in April.

According to CEO David Novak, “China sales are recovering as expected. The extensive media surrounding avian flu in China has subsided and same-store sales at KFC are clearly improving”. He further added, “As KFC sales continue to recover, we expect to have solid momentum in China heading into 2014”.

In the second quarter, Yum! Brands, Inc. (NYSE:YUM) posted earnings of $281 million, or 61 cents a share, compared to $331 million, or 69 cents a share, last year.

Going forward

As the Chinese poultry issue (small quantities of antibiotics were found in KFC chicken) and the horse meat scandal have almost ended, things start to look better for the food giant. In the third quarter of 2013, analysts expect Yum! to earn 95 cents per share on sales of $3.60 billion. For the full year, analysts’ estimates stand at $3.08 a share on $13.50 billion sales.

Valuation

Yum! Brands, Inc. (NYSE:YUM) is trading at a forward P/E (1yr) of 18.9 and has a PEG of 2.15. It’s yielding a dividend of 1.80% and a PEGY of 1.84. Using the food industry’s forward P/E (1yr) of 21.5, I would value Yum! Brands, Inc. (NYSE:YUM) as follows:

Using 2014 consensus estimates, I value Yum! at $81. This reflects that it’s an undervalued stock, having an upside potential of more than 14%, making it a great buy at this stage.

Food industry’s major players

Sales at the world’s biggest hamburger chain, McDonald’s Corporation (NYSE:MCD) , grew 2.6% during the month of May. The company’s new value-priced meals and late night-breakfasts were the chief contributors behind this sales increase. Sales were up 2.4% in the U.S, 2% in Europe and 0.9% in Middle East and Africa (APMEA) region. May turned out to be a far better month for the company as same-store sales had dipped 0.6% in April.