3 Service Firms To Be Wary About

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 |  Includes: COH, FTR, YUM
by: Takeover Analyst

I take a closer look at three service firms that I find have limited upside currently. They cover a range of industries: restaurants, clothing, and telecom. Of the three firms, the Street is most reserved about Frontier (NASDAQ:FTR), given its poor momentum in the face of competitive pressures from sector-wide consolidation. Note that all ratings provided herein are sourced from T1 Banker.

Yum! Brands

Yum! (NYSE:YUM) is rated a "buy" and trades at a respective 23.9x and 17.5x past and forward earnings, with a dividend yield of 1.7%.

Consensus estimates for Yum's EPS forecast that it will grow by 13.9% to $3.27 in 2012, and then by 14.7% and 16.3% in the following two years. Assuming a multiple of 19x and a conservative 2013 EPS of $3.71, the rough intrinsic value of the stock is $70.49, implying 7.6% upside.

Yum had an excellent close to 2011, with EPS rising by 14%, carrying the momentum of double-digit growth. The firm's exposure to high-growth emerging markets additionally hedges against domestic macro concerns. Over half of Yum's EBIT now comes from China and 72 other emerging countries. While the firm is expanding, the input costs for food and labor have also been relatively modest, even as commodity trends have shown signs of easing.

Coach

Coach, Inc (NYSE:COH) is rated a "buy" and trades at a respective 23.5x and 18.5x past and forward earnings, with a dividend yield of 1.2%.

Consensus estimates for Coach's EPS forecast that it will grow by 19.1% to $3.49 in 2012, and then by 16.6% and 16% in the following two years. Assuming a multiple of 19x and a conservative 2013 EPS of $4.02, the rough intrinsic value of the stock is $76.38. It is currently valued at 128% of its historical 5-year average PE multiple.

Management has pulled off a stellar job in reducing the cost base to boost ROIC. For the firm, innovation remains a key driver of value creation, but is highly dependent on unpredictable consumer trends. Distribution gains in North America, China, and western Europe are buttressed by a solid balance sheet that can finance expansion and takeover activity.

Frontier Communicates

Frontier is rated a "hold" and trades at a respective 30.9x and 19.3x past and forward earnings, with a dividend yield of 8.6%.

Consensus estimates for Frontier's EPS forecast that it will grow by 8.7% to $0.25 in 2012, and then by 4.0% and 19.2% in the following two years. Assuming a multiple of 19x and a conservative 2013 EPS of $0.23, the rough intrinsic value of the stock is $4.37.

Continued losses in access lines and dividend complications arising from integrating the Verizon assets have turned investors away. At the same time, the expiration of bonus depreciation rules will increase taxes - although this has been obvious for some time and thus factored into the stock price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.