Should You Buy Yum! Brands Stock At $107?

by Trefis Team
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[Updated 01/20/2021] Yum! Brands Update

Having risen 7% since the end of 2019, YUM! Brands’ stock (NYSE:YUM) seems to be at its near term potential. This is in comparison to the S&P 500 which gained 16% in the same period. The company has seen a revenue fall over recent years due to re-franchising initiatives, while its P/E multiple has risen steadily.  Our dashboard Buy or Sell Yum! Brands? has the underlying numbers.

Due to the Covid-19 crisis, Yum! Brands saw its revenue remain flat in the first 3 quarters of 2020 as the pandemic forced restaurants to operate more on take-away and delivery mode. In Q3 2020, Yum! Brands saw some recovery as it beat consensus estimates for revenue, recording $1.4 billion, up 8% y-o-y and earnings recorded at $0.94 compared to $0.83 in the same period of the previous year. Further, the company reported $853 million of cash inflows from operating activities for the first nine months.

We expect Yum! Brands revenues to go up by 4% for 2020 to $5.8 billion as Q4 revenue will see further growth. However, its EPS figure is likely to fall to $3.50 in 2020. Thereafter, revenues are expected to grow further to $6.25 billion in 2021. In addition, the EPS figure is likely to improve to $4.00. After the recovery in YUM’s stock since late March, we believe that the stock is at its near term potential. 

 

[Updated 06/16/2020] Is Yum! Brands Expensive at $91?

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.

 

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.

 

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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