Is Yum! Brands Expensive at $91?

by Trefis Team
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YUM! Brands’ stock (NYSE:YUM) has bounced back more than 60% since hitting a low of $57 on March 23 to reach its current level of $91 on June 16th, 2020. Notably, this compares to the 24% growth in the S&P 500 over the same period. We believe YUM! brands now has a limited upside potential. The key is the company’s stock is just 9% lower compared to the end of 2019 and 16% above when compared to the end of 2017. Our dashboard ‘What Factors Drove 16% Change In YUM! Brands’ Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

Some of this rise of the last 2 years is offset by the roughly 4.8% fall in seen in Yum! Brands’ revenues from 2017 to 2019, but helped by the Net Income margin which rose from 22.8% in 2017 to 23.1% in 2019. However, earnings growth, on a per share basis, was a much higher 9.6%, driven by share buy-backs. Specifically, the company has invested about $3.2 billion in repurchases in the last two years, resulting in about 12% lower outstanding shares. While Yum! Brands did have about $1.2 billion in cash as of the last report, we believe it will likely be challenging for the company to sustain this level of buybacks.

Finally, Yum’s P/E ratio grew from about 20x at the end of 2017 to 24x at the end of 2019. While Yum’s P/E is down to about 22x now, given the volatility of the current situation, there is a limited upside for Yum’s multiple when compared to levels seen in the past years – P/E of 20x at end of 2017, and 19x as recent as in late 2018.


Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. YUM’s stock is down by about 14% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 6%. Moreover, more than 50% of YUM’s total revenue comes from the US region which is worst impacted by the outbreak. Most restaurants are closed, while some are running in a takeout-only mode. And lower consumer spending and consumption over the coming months will likely lead to lower demand for food and beverages. These factors are bound to hurt YUM’s revenues. We believe YUM’s Q2 2020 results will confirm the trend in revenues as the Americas and Europe will show negative growth. It is also likely to accompany a clearer Q3 as well as FY’20 guidance.

If there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/E decline from the current level of 22x to 19x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $80.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture of historic crashes and how the sell-off in March compares.

YUM! Brands’ stock has nearly recovered in these uncertain times, but what about its competitor Chipotle? See what drove changes in Chipotle’s stock over the recent years.


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