Battle Of The Burritos: YUM Brands Vs. Chipotle Mexican Grill

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 |  About: Yum! Brands, Inc. (YUM), CMG
by: Robert Anders

Taste test aside, we set out to determine which company is a more attractive Buy, YUM Brands, Inc. (NYSE:YUM) or Chipotle Mexican Grill, Inc. (NYSE:CMG). Both firms release quarterly earnings this week, YUM Monday afternoon and CMG Tuesday afternoon. While CMG's primary focus is on its beloved Burrito and other Mexican dishes, YUM encompasses the brands of not only CMG's largest competitor Taco Bell, but also KFC and Pizza Hut. So, going into earnings this week, what's your trade?

Fundamentals

The table below offers an illustration of the basic differences between the fundamentals of the two firms. As you can see YUM's market cap is more than 3X that of CMG. Its size is relevant to understand the scope of its operations. YUM has been and is continuing to generate significant revenue and great growth in China via its KFC brand. Although arguably saturated in the United States, YUM is utilizing its size and vast balance sheet to expand globally, while CMG continues its build out stateside. Described by its higher P/E, investors are currently willing to pay a premium for the younger, growing company and are betting big on the domestic growth.

Company Market Cap. P/E EPS Yield Total Revenue {TTM} Total Assets
YUM $29.8B 19.4 3.4 2.10% $13.6B $8.97B
CMG $9.6B 36.4 8.6 No Div $2.6B $1.7B
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While speculative growth and capital appreciation seeking investors may choose to own CMG, YUM does offer something CMG does not, which may attract investors of a different breed. YUM offers a dividend currently yielding 2.1%. This modest yield barely beats the 10 year U.S. Treasury, but is a source of fixed income for investors who wish to get paid while waiting for potential capital appreciation in YUM, and bet for continued growth in the Chinese market.

Trailing 12 Month Performance

The following table shows the net increase and decrease of important fundamentals of the two firms over the trailing 12 months . Each company was able to increase their Earnings Per Share (EPS), along with their Total Equity and Total Assets. Unfortunately, during this time period, YUM has had a net decrease of Total Cash and Short-Term Investments and a decrease in Total Cash visible from its Cash Flow. This decrease in cash may have been a wise expenditure as YUM has been able to decrease its Total Liabilities over the same time period, even with its expansion in China.

CMG has shown, along with its growth in EPS over the TTM, an increase in Cash & Short Term Investments and a positive change in Cash from its Cash Flow Statement. CMG's growth has been aided in part to its increased financial leverage by adding to its Total Liabilities.

Company Change in Total Assets Change in Cash & Short Term Inv. Change in Total Liabilities
YUM Increase of $140M Decrease of -$256M Decrease of -$234M
CMG Increase of $281M Increase of $118M Increase of $18M
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Company Change in Total Equity (A-L) Change in EPS Net Change in Cash
YUM Increase of $374M Increase of $.23/Share Decrease of $28 M
CMG Increase of $264M Increase of $.44/Share Increase of $168.8M
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As seen from above, both firms have been expanding their operations and have been having success, but under different strategies. Next, we will view how each firm's stock price has performed over the same time period.

12 Month Daily Charts

Plagued by two consecutive worse-than-expected earnings, CMG's stock has not has a good year, contrary to the firm's fundamentals. Although 32% higher than its low for the year following a gap down after a poor earnings release, the stock is off 29% from its high. Depicted below, the stock does move, especially after an earnings release.

(click to enlarge)CMGClick to enlarge

CMG

While YUM has also had periods following earnings in which its stock price fell drastically, each by over 10%, the stock is higher than 1 year ago. Although YUM is only 6.7% higher than its lows for the year, the stock has still had a better year than CMG. Still down 11% from its high, the stock has recently been gaining ground since its most recent fall. As seen below, similarly to CMG, YUM's stock price does move significantly following an earnings miss.

(click to enlarge)YUMClick to enlarge

YUM

So, Which Company is a Buy for Earnings Come Monday?

CMG's rapid domestic growth and build out can be its double-edged sword. Although the growth is generating significant revenue increases for the food chain, it does come at a cost. Rising unemployment, seen by last week's uptick to 7.9%, could continue to keep Americans away from the $10 Burrito Bowls. Like CMG, YUM also has a double-edged sword, China. While The U.S. economic data continues to weaken including its negative growth in the 4th quarter if 2012, China has continued to produce healthy growth. This is why I would rather own YUM relative to CMG. Not only is YUM larger and more diversified in its restaurant portfolio, but its strategically looking to Asia for growth, a nation that is actually growing.

Trading Strategies

Covered Call-Buy YUM stock and sell out-of-the-money calls. With volatility high leading to earnings, the upside calls offer a healthy premium to collect to lower one's cost basis. Although upside is capped, the investor or trader has a higher probability of success than buying the stock outright.

Another way to increase probability of success is by selling out-of-the-money puts or put spreads. Once again, potential upside is limited, as can be the downside if using a put spread.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.