Shares of Yum! Brands (YUM) have declined 9.71% over the past 3 months primarily on growth concern for the company's Chinese operations. At $65.86 per share, the stock trades at 10.8x the NTM EBITDA and 18.8x the NTM EPS. I believe an oversold signal has emerged at this level and investors should not miss this buying opportunity as YUM's robust fundamentals and solid emerging market presence will likely provide a strong support to the stock price down the road.
The following discussion is based on the table below:
My relative value analysis includes a set of restaurant chains primarily operating in the US market. I then value YUM by weighting 5 methods with different group-average valuation multiples - NTM EV/Sales, NTM EV/EBITDA, NTM P/S, NTM P/E, and LTM EV/FCF. Since EV/EBITDA, P/E, and EV/FCF are more relevant valuation measures for established companies - which is the case for most firms in the comp set, they are assigned a 25% weight each. And the less relevant EV/Sales and P/S are weighted by 12.5% each.
Compared with the peers, despite the below-average liquidity condition, YUM is the second largest restaurant chain and outperforms the group in many of the growth and profitability measures. The company also derives 70% of the FY2011 revenues from emerging markets, the highest portion among the group. And along with its strong international brand equity, YUM stock should reasonably warrant a sizable premium valuation.
Nevertheless, the current stock price of $65.86 implies YUM is trading at just 4.1% premium over the 5 group-average valuation multiples, suggesting an over-discounting situation.
The following dividend analysis is based on the 2 charts shown below:
Investors should also note that the stock has a 1.7% dividend yield, which appears to be very sustainable given YUM's solid FCF growth trend.
YUM initiated its first dividend in 2004, and since then, the annual dividend per share has been raised at a 7-year CAGR of 32%, reflecting management's strong commitment to return capital to shareholders. In addition, the firm also has significant improvements on FCF over the past few years, which definitely helps in the continued dividend hike. Since the current annual dividend payments only represent less than half of the annual FCF, it can be safely anticipate the dividend hike would likely continue in the future.
Overall, YUM shares have become more affordable, and in light of the healthy fundamentals and its China growth story, I strongly recommend buying the shares at the current price.
Comparable analysis table and FCF chart are created by author, dividend per share chart is sourced from Capital IQ, and all financial data is sourced from Morningstar and Capital IQ.
Disclosure: I am long YUM.