Is Yum Brands Still Cheap?

Sep.14.10 | About: Yum! Brands, (YUM)

For the past few years I have been a big advocate for investing in Yum Brands (NYSE:YUM). The stock was cheap trading between the high twenties and mid thirties. Shares were a great buy for value investors. However, shares of Yum Brands have been creeping upward and hit a new 52 week high on Monday. So, are shares of Yum Brands still cheap?

Yum Brands is the world’s largest restaurant company. According to the company website, Yum has over 36,000 restaurants in 110 different countries. Yum owns the KFC, Taco Bell, and Pizza Hut, Long John Silver’s, and A&W franchises. The company has seen its domestic growth slow down dramatically over the past few years. To address this problem, the company has been aggressively expanding into international markets over the past decade.

The company has been able to generate over $10 billion dollars in sales each of the past three years. However, the company did see sales drop from over $11 billion in 2008 to just over $10.8 billion dollars in 2009. The company has a massive long term debt burden of $3.2 billion dollars. Yum has generated $1.74 billion in free cash flow. This is enough of a cushion to keep the company’s dividend safe, since the current payout is under 40%. YUM’s current dividend yield is 1.9%.

The fast food industry is extremely competitive. Yum has to contend with McDonald’s (NYSE:MCD) Burger King (BKC), and Wendy’s (NYSE:WEN) for the fast food dollar. Only McDonald’s has a larger market cap than Yum in the fast food industry. Yum’s operating margins and gross margins are higher than most competitors. The company’s return on equity is the best of every major fast food franchise.

Yum Brands is still a great franchise but the stock is no longer the great value that it once was. Yum’s shares currently trade for $45 a share, which is 18 times the current year’s earnings. Yum has been able to grow earnings at a 13% clip over the past five years. The stock trades at nearly 1.5 times price to earnings growth and 1.9 times sales.

If I owned shares of Yum, I would continue to hold the stock. However, I would not be buying shares of Yum at its current levels.

Disclosure: No position