2023-06-01 14:22:16 ET
Summary
- The American consumer remains resilient, but cautious, helping price-focused discretionary companies.
- Within the expensive restaurant space, I don't see Yum! Brands as being on the value meal menu.
- Robust EPS growth is appropriately priced into YUM's share price, and I outline key price levels to watch.
Look around the market, and you'll find some high valuations in tech land. But it is within the consumer space where some unusually pricey equities are seen. Those high P/Es are sometimes warranted given consistent and robust EPS growth trends and a resilient consumer.
I have a hold rating when piecing everything together on Yum! Brands (YUM).
S&P 500 Forward P/E Multiples: Expensive Restaurant Stocks
According to Bank of America Global Research, YUM, whose brands include KFC, Pizza Hut, and Taco Bell, is one of the largest restaurant operators in the world with about 55,000 stores in more than 120 countries. A significant portion of operating profits are derived internationally, with a growing contribution from emerging markets, including a heavy presence in China.
Back in early May, the firm reported an operating earnings miss while GAAP profits grew by a modest 3% year-on-year. Core operating margins verified at 11% with a one percentage point headwind stemming from weakness in Russia. Comps were decent, but performance relative to pre-COVID levels was not as sanguine.
What's more, as the China reopening sputters, there are key risks to this discretionary stock with its heavy presence in that region. Still, consistency from Taco Bell and slightly better comps out of KFC and Pizza Hut should help to grow non-US growth in the quarters ahead. Key risks include of course China, but also higher domestic labor costs and stiffer competition across all geographic areas.
The Louisville-based restaurants industry company within the Consumer Discretionary sector trades at a high 30.2 trailing 12-month GAAP price-to-earnings ratio and pays a small 1.1% dividend yield, according to The Wall Street Journal.
On valuation , analysts at BofA see earnings rising at a solid pace through 2025. Per-share profits are seen as climbing from near $4.50 at the trough level to more than $5 this year, while EPS should approach $7 by FY 2025. The Bloomberg consensus forecast is about on par with what BofA projects. Dividends , meanwhile, are expected to hover at $2, though. Free cash flow is not exceptional at YUM, with an FCF yield near 4%.
The P/E multiple appears high, but considering the double-digit growth that is consistent over the coming quarters warrants a high value. YUM's EV/EBITDA ratio is also slightly less than twice that of the broad market, though profitability is very strong.
Yum! Brands: Earnings, Valuation, Dividend Forecasts
If we apply the 5-year average P/E of 25.8 to $5.30 of next-12-month EPS, then the stock should be near $137. I suspect there is more downside than upside risk to that valuation given consumer trends and higher interest rates today. As such, I have a hold on valuation.
YUM: Near Fair Value Versus History
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q2 2023 earnings date of Wednesday, August 2 BMO. Same-store sales data will also be released that day. Before the Q2 report hits the tape, though, YUM's management team presents at the Bernstein 39th Annual Strategic Decisions Conference (SDC) 2023 on June 1 and 2 and the TD Cowen 7th Annual Future of the Consumer Conference 2023 on June 6 and 7. New industry and firm-specific trends could be announced at those gatherings, so volatility may jump.
Corporate Event Risk Calendar
The Options Angle
Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a consensus Q2 EPS forecast of $1.23 which would be a solid 17% rise from $1.05 of per-share earnings in the same quarter a year ago. YUM has a poor short-run bottom-line beat rate, and the stock has traded lower post-earnings in three of the last four instances.
This time around, options traders have priced in a small 3.1% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the August reporting date. Shares have not ranged more than 3% post-earnings since July 2021, so that modest premium amount is warranted in this case.
YUM: Low Implied Volatility Going Into Summer
The Technical Take
With shares near fair value, the chart features concerning trends. Notice in the graph below that YUM has fallen hard after a bearish false breakout back in early May. Shares now challenge the rising 200-day moving average and further support at the March 2023 low of $124. So, the mid-$120s is a key spot to watch. Under $120 could lead to a test of the October nadir of $104.
On the upside, we need to see YUM close above the early 2022 peak of $140 for a few days to negate the recent false breakout. It is interesting to see a volume spike on May 31, but the stock was not a whole lot changed that day. Overall, the chart is neutral given a rising 200-day moving average, but also a bearish false breakout that is still in play.
YUM: Bearish False Breakout, A Test of the 200-Day
The Bottom Line
I have a hold rating on YUM based on valuation and technicals. Its P/E multiple premium is warranted, but optimism appears appropriately priced in, while the chart has mixed signals.
For further details see:
Yum! Tasty EPS Growth Baked In, Hold On Valuation And Technicals