Yum! Brands (YUM) has been a leader in the fast food industry since its inception. The company has done a lot to improve its position in the market over the last couple of years and after a strong earnings report last week, the company's shares look like they may enter a bull run soon. In this article, I evaluate Yum! shares and place a Buy recommendation on the stock.
The company that became Yum! Brands was spun off of PepsiCo (PEP) in 1997 and consisted of Taco Bell, Pizza Hut, and KFC. In 2002, the company acquired Long John Silver's and A&W and changed its name to Yum! Brands. In 2011, the company went back to owning its original three franchises after finding buyers for Long John Silver's and A&W.
On its website, Yum! Brands lists four major growth initiatives. These are "Build leading brands across China in every single category", "Drive aggressive international expansion and build strong brands everywhere", "Dramatically improve U.S. brand positions, consistency and returns", and "Drive industry leading long term shareholder and franchisee value". The main focus here appears to be on international growth, with major emphasis on China. The fast food industry as a whole, including McDonald's (MCD), has struggled meeting growth expectations in China over the last year, but Yum! Brands has had success in China. KFC is China's most successful Western brand and Yum! is experimenting with a new brand, East Dawning, that is similarly structured to KFC, but serves Chinese food with a quick service model.
Yum!'s goal is to deliver 10 percent annual EPS growth for the foreseeable future. The company has boosted EPS by 13 percent per year over the last five years and analysts expect this trend to continue over the next five years.
Yum! Brands has a December 2012 forward P/E ratio of 21.63 and a December 2013 forward P/E of 18.97. This is far above market averages, but with a consistent track record and above-average expectations, this is a small price to pay for consistency. At its current price, I believe Yum! Brands is fairly valued and investors who are long on the stock should expect share price growth that is similar to its current earnings growth of around 13 percent.
I currently place a Buy recommendation on Yum! Brands. Out of 23 analysts who give opinions on Yum!, 7 give it a Strong Buy recommendation, 8 give it a Buy, and 8 give it a Hold. This emphasizes the low potential downside of Yum! brands and consistent growth that the company has been able to establish. Since going on the market in 1997, YUM is up 838.2 percent. Being up 90.5 percent over the past five years and 36.1 percent in the last year, I believe Yum! Brands will continue this trend in the future.