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Alex Shadunsky
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Alexander Shadunsky began his career in business at a young age, when he became a part of the family newspaper business. After a brief stint in retail, he developed an interest in value investing and has been uncovering undervalued opportunities ever since. He is a regular reader of Seeking... More
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  • Yum! Brands: Attractive Company But Has To Fall Further To Become An Attractive Stock  1 comment
    Jun 4, 2012 2:40 PM | about stocks: YUM

    With investors selling stocks because of various reasons, I thought it would be a good idea to take a closer look at stock with more stability in its results and that led me to Yum! Brands (YUM), with its collection of fast food restaurants. YUM fell significantly on Friday and now is trading at its early-2012 levels, which may provide an opportunity for investors. However, looking further into the details I come to a different conclusion. From the valuations I see, the drop in the stock has just sent the stock from overvalued to fairly valued and suggests that YUM needs to fall further to become attractive for a position in an investor's portfolio. Below is an in depth look at the valuation metrics and stock chart.

    Valuation: Yum! Brands' trailing 5 year valuation metrics suggest that the stock is fairly valued as there is a mixed message about the valuation metrics compared to their 5 year averages. Yum! Brands' current P/B ratio is 13.9 and it has averaged 21.7 over the past 5 years with a high of 71.8 and low of 11. Yum! Brands' current P/S ratio is 2.3 and it has averaged 1.7 over the past 5 years with a high of 2.5 and low of 1.1. Yum! Brands' current P/E ratio is 20.1 and it has averaged 19 over the past 5 years with a high of 22.8 and low of 14.3.

    Price Target: The consensus price target for the analysts who follow Yum! Brands is $79. That is upside of 24% from today's stock price of $63.42 and suggests that the stock is fairly valued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.

    Forward Valuation: Yum! Brands is currently trading at about $63 a share with analysts expecting EPS of $3.81 next year, an earnings increase of 15% y/y, for a forward P/E ratio of 16.6. Taking a look at the company's publicly traded comparisons will give us a better idea of the stock's relative valuation. McDonald's (MCD) is currently trading at about $86 a share with analysts expecting EPS of $6.24 next year, an earnings increase of 10% y/y, for a forward P/E ratio of 13.9. Wendy's (WEN) is currently trading at about $5 a share with analysts expecting EPS of $0.21 next year, an earnings increase of 40% y/y, for a forward P/E ratio of 21.9. Tim Hortons (THI) is currently trading at about $52 a share with analysts expecting EPS of $3.09 next year, an earnings increase of 13% y/y, for a forward P/E ratio of 16.7. The mean forward P/E of Yum! Brand's competitors is 17.5 which suggests that Yum! Brands is fairly valued relative to its publicly traded competitors.

    EV/EBITDA Comps: On an EV/EBITDA basis comparison, the stock is valued about right. Yum! Brands' current EV/EBITDA multiple is 11.8 versus the average of 10.5 for its publicly traded comps.

    Earnings Estimates: Yum! Brands has beat EPS estimates 3 times in the past 4 quarters. The company's EPS figures have come in between 0 cents and 5 cents from consensus estimates or about 0% to 8.2% from analyst estimates. The company's earnings come been relatively close to consensus estimates which suggests that analysts are good at projecting the company's results and share upside from earnings surprises will be limited.

    Price Action: Yum! Brands is up 20.08% over the past year, outperforming the S&P 500, which is up 0.7%. Looking at the technicals, the stock is currently below its 50 day moving average, which sits at $70.81 and below its 200 day moving average, which sits at $60.75.

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

    Stocks: YUM
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  • Author’s reply » link to a recent article on YUM: http://seekingalpha.co...
    19 Jun 2012, 07:30 PM Reply Like
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