Restaurants are, and will continue to be, an extremely profitable business. As a result, shareholders who have interest in brands such as McDonalds and Starbucks need not to worry about negative implications for the food soldiers compared to more risky industries. One company in particular, Yum! Brands (YUM), is another brand investors should become familiar with. Consumers may recognize the more specific stores the company owns such as Taco Bell and Pizza Hut, but investors should realize the sales and earnings growth associated with this organization. In addition, while there are many companies in the restaurant industry, Yum not only rings familiar with consumers like Starbucks, but Yum engenders excellent financial news at a level above its competitors.
However, before trying to access these financial statements, it is important to understand more specifics about Yum's business model. According to Reuters, Yum "is a quick service restaurant (QSR) with over 34,000 units in more than 100 countries and territories." These quick service restaurants include consumer favorites such as Taco Bell, Pizza Hut, Long John Silver's, and KFC. Whether the operating segment sells pizza or chicken, "Yum develops, operates, franchises and licenses a worldwide system of restaurants, which prepare, package and sell a menu of food items." As each of these fast-food places is obvious to most readers in America, it is also quite interesting that over 100 countries are familiar with these names as well. In fact, segments like KFC were actually introduced in many markets like China before more obvious competitors like McDonalds. Since fast food is generally considered an inelastic, or non-cyclical, good, even during times of economic uncertainty, Yum will prosper. While most of its food is reliably cheap compared to rivals such as Brinker and Darden, consumers will still flock to Yum restaurants in similar volume during any stage of the economic cycle. Therefore, revenue growth should continue to remain steady, but positive, year after year making Yum a great portfolio choice at any time.
To justify this claim, during the past twelve months, Yum received a revenue figure, according to Reuters, of $ 9.56 billion. This number was a 5.05% increase compared to the previous year number. While this increase in margin was a bit below the average year-to-year increase of 6.58%, the difference in growth declination was only a 23% difference. Other companies like Brinker saw a 43% deceleration during this same time period. In addition, while some investors may critique the industry 11.31% growth in sales during the past to Yum's lower numbers, it is also important to realize that Yum supports the seconds highest sales figure in its industry, and appreciation of revenue growth will be much difficult than smaller-capitalization companies to come-by. This is in addition to the fact that many lower-revenue companies in this industry are actually seeing negative sales growth (not deceleration) during the same time frame as the aforementioned analysis. With these thoughts on sales at hand, these numbers can be used at the broadest levels to illustrate that the steady increase and influx of money into Yum over its career has aided in the appreciation of its share price. Since 2003, not once has Yum seen a calendar year decrease in price. This comes with a 25% appreciation in 2006 and a 12% escalation so far in 2007 – despite the recent economic turmoil. These sales and share price indications illustrate that Yum will fair very well during all types of economic activity.
Neverheless, revenue can not be the only financial analysis required to find superior companies. It is vital to understand how efficient a company is in reducing costs and using capital and labor to actually produce the final good. These intangible-sounding comparisons can actually become meaningful given the use of margins. Starting from gross margins, investors should be happy to find out that over the past twelve months, growth at 25.69% has been higher than the pervasive five year average of 24.82%. While the former is a bit below the industry's average of 29.04%, it is important to stress that Yum's revenue is the second highest in a fairly large industry, making outstanding margins difficult to come by. Compared to close revenue competitors, Yum's gross margins are better than Starbucks's (23.62%), Darden's (23.50%), and Brinker's (16.42%). In addition, Yum's operating margins of 13.14% are not only higher than its five year average of 12.84%, but is doing better than the industry's twelve month margin of only 11.76%. Moreover, these operating figures for Yum are also better than the same-time period numbers of Starbucks (11.18%), Darden (9.53%), and Brinker (7.87%). While these numbers all indicate growth for Yum, the largest instrument (that will be justified later with valuation tactics) is earnings differences. Fortunately for Yum, a 16.27% increase in earnings per share over the past year is 29.74% higher that the company's five year average increase. Compared to competitors, all three of Brinker, Darden, and Starbucks saw a deceleration of earnings growth last year, and none of these annually increases matched the top-revenue producer, Yum.
While there is clear evidence that Yum is a great growth story, some investors may wonder whether Yum is overvalued given its success. Fortunately for these investors, this is not the case. In fact, some potential shareholders may make the claim that Yum is undervalued. Currently the industry has a P / E multiple of 31.88 and a price to sales ratio of 2.10. However, if analyst expectations are correct or or underestimate actual results (5/5 and 4/5 correct or below last five quarters for EPS and sales respectively), Yum sees a forward price to sales ratio 1.79 and price to earnings ratio of 20.18. Now while these numbers are not extraordinarily undervalued, as companies like Darden have slightly lower figures, compared to the industry as a whole and competitors like Starbucks (2.25 price to sales and 31.48 price earnings), Yum's valuation is far from being labeled as a negative characteristic. Therefore, given good growth reports and not too much speculation relative to share price, there is strong news from both further financial achievement and valuation.
However, before reaching a final conclusion, there are some other indicators to look at. One of these criteria is management efficiency. According to Reuters, Yum had seen a 60.80% ROE figure for the past twelve months. While a bit smaller than the five year average, the number easily obliterates the industrial average and all three aforementioned market-cap competitors. This figure illustrates that Yum is not only increasing its net profit year after year, but helping investors by purchasing back some of its stock. Although capital spending is a bit below industrial rates at -0.70% over the past five years for Yum, the company still has a healthy balance sheet of cash, especially compared to its price (undervalued). In addition, efficiency also comes from the company's turnover ratios. Receivable turnover at 41.62%, inventory turnover at 80.93%, and asset turnover at 1.61% are all quite above the industrial averages and many competitor rates as well. Solvency with a current ratio of 0.59 is quite low, but inline relative to the rest of the industry, but fast food restaurants need not to worry too much about liquidating assets. In addition, 83.13% of equity for Yum is owned by institutional investors. This number is above the industrial figure at 74.07% and also above Darden's and Starbuck's proportional numbers. While there are many intelligent retail investors, having the real experts in institutional investors carry the bulk of the company shows optimism for future performance. And in addition to this control, another enticement in a 1.81% dividend yield should also help investors relay this company into more hands at a higher share price.
Looking at the business model and fundamental features, there is strong evidence to support that investing in this company will yield strong returns. Technically speaking, the share price of Yum just recently crossed both the 50 day SMA and EMA – a bullish signal, and while there is encouragement to invest any time to profit from this company, now would be an almost ideal situation. Therefore, with the above information provided to benefit long term investors, it is closely assured that investing in YUM! Brands will produce genteel capital gains for shareholders.