Thursday, April 3, 2014

How Yummy is Yum Brands' Valuation?

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%.

Discounted Earnings:

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.

Graham Number:

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.

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8 comments:

  1. Nice valuation PIP. It's incredible that YUM's stock price has gotten up here, when you consider that every quarter the Cassandras come out in force :o) I bought McDonalds a while back on the pullback....and I look to do the same with YUM.
    -Bryan

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    1. Bryan,

      I'm hoping for some more emerging market or China specific concerns to knock that share price down. Even better if it comes soon because the next ex-div is 4/9. I think around $70 I'd be interested but it'd be a smaller purchase to start off with. Unless it gets down into the $60's I'm not overly excited about it.

      Thanks for stopping by!

      Delete
  2. PIP,
    Compelling argument to buy this company on a correction. These are some great brands overseas. I don't have any exposure to restaurants and this one is on my list. Great companies rarely get cheap, so its a matter of buying it at a fair price, which will likely still be a premium over fair value.
    -RBD

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    1. RBD,

      I'm definitely looking to buy on a correction. I think they are set up nicely to deliver some great results, both operationally and for dividend growth. Looking at both MCD and YUM was pretty surprising when I crunched the numbers on store counts. It's pretty amazing to see the growth potential they both have. I don't expect the store count numbers to get to the same ratios as they have in the US because China is going to continue to get much more densely populated meaning less stores to serve the same area. But even half of the restaurant to people ratio of the US in China/India is going to mean a heck of a lot of restaurant openings.

      Thanks for stopping by!

      Delete
  3. Thanks for sharing. I like everything taco bell has done recently, but I do agree that the current price is not an ideal entry point. I think they have a lot of room for growth, and will definitely be looking to buy once we see a pullback.

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    1. Ryan,

      I always wondered why Taco Bell never branched into breakfast foods. I can't speak for the rest of the country, but I know here in Texas breakfast tacos are a fairly regular breakfast item. Seems like a good fit for Taco Bell but it took them a while to move that direction. I'm also looking to buy on a pullback because I think it'd be a good complement to McDonald's.

      Thanks for stopping by!

      Delete
  4. It's hard to find value in the market today. But I'm rounding up a list of elite dividend payers to look out for when the market has a huge correction. This one is definitely on my look out list.

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    1. Marvin,

      I think YUM has excellent prospects moving forward. I'm doing a bit of the same as I'm not overly excited about putting much capital to work right now so it's the perfect time to refocus my attention towards valuations and what prices offer solid values.

      Thanks for stopping by!

      Delete