Yum! Brands (NYSE: YUM): Yummy Chicken, Expensive Stock
Reporting earnings this Wednesday evening, Yum! Brands could fly the coup this quarter, but lay an egg over the longer term
Yum! Brands (NYSE: YUM), the operator of well-known concepts KFC, Pizza Hut, Taco Bell, Long John Silver and A&W, has faced down some serious blemishes to its record in recent times, including a New York City rat infestation issue that received an awful lot of awful publicity. If you forgot about that, perhaps you remember the E.Coli outbreak at its Taco Bell unit. I’m sure the folks that got sick still remember, as do their lawyers…
Even so, YUM blew out the consensus estimate by 11.1% in the first quarter, as compiled by Thomson Financial. YUM’s international expansion effort and acceptance, especially in China has offered a nice growth venue, and provides a good use of capital from its domestic cash cow operations. In fact, China segment operating profit climbed 31% last quarter.
Still, rising food costs across most proteins and other foods are bound to pressure margins, and those costs are universally rising, not just in the U.S. But, as YUM’s gross margin is pressured, its operating margin continues to benefit from economies of scale in its international expansion. Last quarter, gross margin narrowed by 78 basis points, while operating margin more than made up for the strangle, widening by 69 basis points.
Estimates for Q2, which will soon close, show a declining trend from 37 cents 90 days ago to 36 cents today, according to Thomson Financial (adjusted for 2:1 split Jun 27). Even so, full year 2007 estimates have increased approximately 2 cents to $1.63 (adjusted) during that time. The explanation being, while analysts are reducing their near-term outlook, they still had to compensate for their shortcomings in the first quarter by adjusting the full year number higher.
YUM trades at 21X the ’07 EPS consensus number, while analysts expect EPS to grow about 12% this year and over the next five years. That’s a bit of an expensive price for growth at that rate, in our view. Considering last quarter’s growth ahead of estimates, maybe analysts are understating growth expectations though. Even so, there are some serious risks to worry about, with food costs rising and increasing pressure on the American consumer. Still, we would expect the casual dining sector, including the likes of Darden Restaurants (NYSE: DRI), Brinker International (EAT) and Cheesecake Factory (CAKE), to bear the brunt of that pressure, not the lower ticket fast-food behemoth.
YUM doesn’t compare too poorly to fast-food peer, McDonald’s (MCD), which carries a P/E of 19X its consensus estimate for 2007. However, we think the entire restaurant sector is in store for a valuation adjustment, thanks to indications that the consumer is weakening. While this quarter could provide another upside surprise, expectations may be pricing that in at this point. As yummy as its fried chicken is, we wouldn’t own YUM now.
This article was initially published at Motley Fool. Wall Street Greek has the exclusive right to republish this article. We thank you for your support of our advertisers. It and our passion for the markets are the sustaining force fueling our effort. (disclosure)
Yum! Brands (NYSE: YUM), the operator of well-known concepts KFC, Pizza Hut, Taco Bell, Long John Silver and A&W, has faced down some serious blemishes to its record in recent times, including a New York City rat infestation issue that received an awful lot of awful publicity. If you forgot about that, perhaps you remember the E.Coli outbreak at its Taco Bell unit. I’m sure the folks that got sick still remember, as do their lawyers…
Even so, YUM blew out the consensus estimate by 11.1% in the first quarter, as compiled by Thomson Financial. YUM’s international expansion effort and acceptance, especially in China has offered a nice growth venue, and provides a good use of capital from its domestic cash cow operations. In fact, China segment operating profit climbed 31% last quarter.
Still, rising food costs across most proteins and other foods are bound to pressure margins, and those costs are universally rising, not just in the U.S. But, as YUM’s gross margin is pressured, its operating margin continues to benefit from economies of scale in its international expansion. Last quarter, gross margin narrowed by 78 basis points, while operating margin more than made up for the strangle, widening by 69 basis points.
Estimates for Q2, which will soon close, show a declining trend from 37 cents 90 days ago to 36 cents today, according to Thomson Financial (adjusted for 2:1 split Jun 27). Even so, full year 2007 estimates have increased approximately 2 cents to $1.63 (adjusted) during that time. The explanation being, while analysts are reducing their near-term outlook, they still had to compensate for their shortcomings in the first quarter by adjusting the full year number higher.
YUM trades at 21X the ’07 EPS consensus number, while analysts expect EPS to grow about 12% this year and over the next five years. That’s a bit of an expensive price for growth at that rate, in our view. Considering last quarter’s growth ahead of estimates, maybe analysts are understating growth expectations though. Even so, there are some serious risks to worry about, with food costs rising and increasing pressure on the American consumer. Still, we would expect the casual dining sector, including the likes of Darden Restaurants (NYSE: DRI), Brinker International (EAT) and Cheesecake Factory (CAKE), to bear the brunt of that pressure, not the lower ticket fast-food behemoth.
YUM doesn’t compare too poorly to fast-food peer, McDonald’s (MCD), which carries a P/E of 19X its consensus estimate for 2007. However, we think the entire restaurant sector is in store for a valuation adjustment, thanks to indications that the consumer is weakening. While this quarter could provide another upside surprise, expectations may be pricing that in at this point. As yummy as its fried chicken is, we wouldn’t own YUM now.
This article was initially published at Motley Fool. Wall Street Greek has the exclusive right to republish this article. We thank you for your support of our advertisers. It and our passion for the markets are the sustaining force fueling our effort. (disclosure)
posted by The Greek | 4:00 PM
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