Summary
- Yum! Brands is a very consistent performer, as expected with any industry staple.
- The company has seen the segment revenue mix change leading to lower operating margins.
- At 28x P/E, I think there are better industry stalwarts to invest in than Yum! Brands.
Introduction
Yum! Brands, Inc. ( NYSE: YUM ) is a holding company with some of the world's favorite fast food chains. These include KFC, Taco Bell, and Pizza Hut. With these brands, the company is very stable and a stalwart in the industry.
Over the past few years, the revenue mix has changed. KFC (the highest margin segment) has declined, and Taco Bell has increased. This has, in turn, reduced operating margins for the business. But overall, the company is still seeing higher same-store sales and strong net income flow. Taken altogether, with a 28x price to average earnings and with a weak balance sheet, I would rather buy other industry staples.
Financial History
Yum! Brands Revenue (SEC.gov) Yum! Brands Operating & Net Income (SEC.gov) Yum! Brands Operating & Net Margins (SEC.gov)
Yum! Brands is a very stable company with well-known brands. This is seen in the revenue trends of the past five years. The business has generated around $5.5-6 billion in any given year. In 2021, the company saw a 16% jump due to higher traffic after the pandemic. While revenue has been pretty steady, operating income has seen a slight downtrend until 2021. This is due to the operating margin decline. Part of this is the effects of costs on the business from COVID-19 and the recent costs from inflation and supply issues. That being said, there is an overall downtrend in operating margins. Despite this, net income and margin have held up well.
Yum! Brands Same Store Sales (SEC.gov) Yum! Brands Revenue By Segment (SEC.gov)
Looking at the charts above, Yum! Brands has seen nice same-store sales for an established and large industry player. As can be seen, the company saw a big 16% same-store sales gain that helped boost revenue last year. Overall, positive same-store sales in four of five years are pretty impressive. Taking a look at each segment shows that KFC and Taco Bell are the stalwarts of the business, with Pizza Hut next and Habit Burger being a new brand purchased in 2020.
KFC has seen a slight revenue decline over the past five years, while Taco Bell has seen the opposite. This is not the greatest news for Yum! Brands, since KFC easily is the highest margin segment. The new purchase of Habit Burger showed some promise in the first year, with same-store sales growth of 16% and operating profits posted. Overall, the company is still very stable and has some of the largest food brands in the world, but the highest margin segment has declined, which has changed the operating efficiency of the business.
This Year So Far
So far at the midyear of 2022 , Yum! Brands has seen revenue growth of 3% on same-store sales growth of 2%. KFC has grown 2%, Taco Bell 8%, and Habit Burger 1%, while Pizza Hit declined by 4%. This is generally the same trend that the long-term history showed; Taco Bell is growing faster, and the business as a whole is showing positive same-store sales. I would have expected more growth out of Habit Burger, which is disappointing. Even with this growth, operating and net income decreased by 4% and 13% each. Operating margin was about the same as last year, but met margins have declined as income tax provisions slightly increased. Overall, the year is shaping up in line with the long-term trend, and no surprises should arise.
Outlook For Yum! Brands
The outlook for the company is not bad at all, but the current economic landscape could create some smaller headwinds. With persistent high inflation it is likely that Yum! Brands will see some decrease in demand in North America. Fear not, though, as the company is mostly an international business, with 67% of all units sold overseas. Therefore, any inflationary and recessionary risk that may be present in the United States won't have much of an effect on Yum! Brands as a whole. I would expect the business to see a generally normal year in 2022 compared to the last five years, with a continued trend in the operating income declining due to segment mix changes.
Balance Sheet
While Yum! Brands has very stable operations, the financial health of the balance sheet could use work. The company does have ample liquidity with a current ratio of 1.21x but is highly leveraged. There is a deficit in stockholder equity, thus making the business entirely funded on debt. This won't be a problem for the company as operations are robust, but it is not ideal to see as an investor.
Valuation & Dividend
Yum! Brands Dividend History (Yum! Brands Investor Relations)
As of writing, Yum! Brands trades around the $115 price level. At this level, the company has a P/E of 27.7x using the average five-year EPS of $4.15. Yum! Brands does offer an almost 2% dividend yield which isn't bad. The payout ratio is about 55% and the business has paid one for the last 18 years. At this valuation, I feel I could find better industry stalwarts to buy that have better growth outlooks, balance sheets, along with similar dividends. This is especially true if KFC keeps declining for the business and takes the operating margins lower with it.
Conclusion
While Yum! Brands has stability, it lacks any great growth outlook and has a poor balance sheet. It wouldn't be too hard to find other industry staples with all three factors, and even maybe better dividend history. Overall, Yum! Brands isn't a bad company, I just think at a 28x multiple that one could find a better investment.
For further details see:
Yum! Brands: Not My Taste