We believe that there are other stocks in the food and beverage industry that are currently better valued than Yum! Brands (NYSE: YUM). YUM’s current price-to-operating income ratio (P/EBIT) of 33.6x is much higher than levels of 29.9x for Monster Beverage (NASDAQ:MNST), 27.7x for Keurig Dr Pepper (NASDAQ: KDP), and 22.3x for Mondelez International Inc (NASDAQ: MDLZ). These stocks have a lower valuation (P/EBIT) compared to Yum! Brands, while all of them have seen better revenue and operating income growth. This disconnect between valuation and performance could mean that you are better off buying MNST, KDP, and MDLZ vs. YUM stock. More specifically, we arrive at our conclusion by looking at historical trends in revenues, operating income, and P/EBIT for these companies. Our dashboard – Better Bet Than Yum! Brands Stock: Pay Less To Get More From Sector Peers MNST, KDP, MDLZ– has more details – parts of which are summarized below.
1. Revenue Growth
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Yum! Brands’s revenue grew at an average rate of -1.3% over the last three years, as compared to average revenue growth of 11% for Monster Beverage, 43% for Keurig Dr Pepper, and 0.9% for Mondelez International Inc. If we look at the revenue growth over the last twelve month period, Corning’s revenue growth of 4.8% compares favorably with a 2.8% growth of Mondelez International Inc, but it is much lower compared to average growth of 9.5% for Monster Beverage and is similar to 4.5% growth of Keurig Dr. Pepper.
2. Operating Income Growth
The three-year average operating income growth for Yum! Brands stands at -25%, much lower than 11% for Monster Beverage, 48% of Keurig Dr Pepper, and 8.7% of Mondelez International Inc. Better operating margin has led to higher operating income for Monster Beverage despite lower revenue than Yum! Brands. Looking at the last twelve month period, Yum! Brands operating margin has still been better than Keurig Dr Pepper, and Mondelez International Inc. This is despite a 5% operating income fall which can be attributed to an increase in operating costs and fall in revenue during the pandemic.
The Net of It All
Although Keurig Dr Pepper, and Mondelez International Inc’s revenue base is larger than Yum! Brands, they appear to be significantly cheaper. Despite better profit and revenue growth in the last three years, these companies have a comparatively lower P/EBIT. Even if we were to look at the last twelve months operating income growth a year ago, Monster Beverage, Keurig Dr Pepper, and Mondelez International Inc fare better compared to Yum! Brands, and even then Yum! Brands was trading at a higher multiple.
Yum! Brands persistent underperformance in revenue and operating income growth compared to the other three companies reinforces our conclusion that the stock is expensive compared to its peers, and we think this gap in valuation will eventually narrow over time to favor the group of more attractively priced names. As such, we believe that Monster Beverage, Keurig Dr Pepper, and Mondelez International Inc are currently better buying opportunities compared to Yum! Brands.