Last week I updated my valuation of McDonald's Corporation (MCD) and the price appears to offer a decent value. You can read the full analysis here. As more of a growth play I wanted to take a look at its largest competitor YUM! Brands, Inc. (YUM). YUM! Brands is heavily focused on international expansion which could lead to a long growth curve. Shares of YUM! Brands closed trading on Friday, March 28th at $74.20 giving a current yield of 1.99%.
Analysts followed by Yahoo!Finance expect YUM! Brands, Inc. to grow earnings 12.32% per year over the next 5 years and I've assumed they can grow at 9.24% (75% of 12.32%) for the next three years and 4.50% in perpetuity. Running these numbers through a discounted earnings analysis with a 10% discount rate and summing over 30 years yields a fair value price of $84.41. This means the shares are trading at a 12.1% discount to the discounted earnings analysis.
The Graham Number valuation method was conceived of by Benjamin Graham, the father of value investing, and calculates the maximum price one should pay for a company given the earnings and book value. YUM! Brands earned $2.36 per share in fiscal year 2013 and ended with a book value per share of $4.89. The Graham Number is calculated to be $16.11, suggesting that it's overvalued by 360.5%. Since we invest for the future, let's replace the earnings per share with forward looking earnings of $3.63 for FY 2014.
Click here to read the rest of the analysis.
If you want to receive posts via email and sign up for my newsletter you can do so here or on the Subscribe page at the top of this blog.