Is Yum! Brands Tasty Once Again?

Yum! Brands (YUM) announced fourth quarter ended December 26, 2015 total revenue of $3.95 billion, slightly below $3.99 billion during the same period last year.

Yum! Brands declared fourth quarter of 2015 net income of $275 million or $0.63 per diluted share compared to a net loss of $86 million or $0.20 of diluted loss per share in fourth quarter of 2014.

Positives despite the pain

The fast food company reported a slight fall in year-over-year top line growth and reiterated a significant improvement in its bottom line growth primarily driven by notable growth in the company’s worldwide restaurant sales across all its key food brands including, KFC, Pizza Hut, Taco Bell and many more.

Yum! Brands has uniquely separated its original food brand into two innovative high-performing companies including, Yum China comprising of Pizza Hut and KFC brands and Yum New comprising of KFC China, KFC, Taco Bell, PH China and Pizza Hut.
The planned separation is believed to deliver approximately $6.2 billion of capital return and thus, sustaining nearly 5 times balance sheet leverage. In addition, Yum! Brands has delivered solid long-term financial results with approximately 11 percent of total shareholder returns, EPS CAGR of nearly 13% and impressive store growth adding 13,000 units with China’s superior performance acting as a catalyst for this significant growth.

Yum! Brands is observed to be a truly international company driven by robust year-over-year sales in China with just nearly 200 restaurants and below $20 million of total company profit in 1997 to a significant and projected $700 million of consolidated profits coupled with approximately 7,000 restaurants in 2015 and an impressive operational profit CAGR for China division of over 20%.

A smart move

The strategic separation of Yum into two new brands Yum China and Yum New is believed to deliver superior brand value, allowing for well-diversified company expansion with Yum China focused on investments in China, develop solid China appeal, and deliver outstanding growth in China, focus on delivering nearly 15% EPS improvement. New Yum brand is targeted on delivering superior margin, worldwide franchise company with key worldwide expansion and focused on offering nearly 15% stakeholder returns.

Both the Yum brands are separately delivering significant year-over-year company growth with notable expansion return objectives including, Yum China expected to deliver approximately 15% of EPS expansion and Yum New is forecasted to deliver about 15% of continuing shareholder returns.

The long-term growth prospects of global fast food market seem hugely positive with higher disposable income of consumers in the US and rapidly shifting consumption pattern across the country. Other regions including, Latin America, Asia Pacific, Brazil, India and China are projected to witness notable expansion over the estimated period owing to a significant estimated customer base and rapidly changing lifestyle in these countries.

The eye-catching growth of Yum! Brands is believed to continue both over the short-term and longer term and mainly driven by each of the company’s key business segments delivering notable performance further, allowed by favorable and exploding global demand for fast foods.

Yum! Brands is expected to have solid and significant capital return potential with robust free cash flows generation capability. The company is expected to deliver approximately $1 billion of net EBITDA post license fee for the complete fiscal year 2015 with no notable external debt. For the new Yum! Brands which is 96% franchised, the company forecast to deliver nearly 15% of continuing EPS growth with highly diversified profits, minimized capital utilization capacity and poorly volatile brand image. Going forward, Yum estimates to deliver approximately 15% of continuing EPS growth.


Overall, the investors are advised to “Buy” equity in Yum! Brands, Inc. looking at the company’s significant growth prospects with healthy PEG ratio of 1.64 which is comparable to the industry’s growth average of 1.42. The profit margin of 9.87% seems satisfactory. However, Yum needs to optimize its debt-burdened balance sheet with significant total debt of $3.98 billion against weaker total cash position of $737.00 million only, restricting the company to make future growth investments.
Published on Mar 2, 2016
By Vinay Singh

Copyrighted 2020. Content published with author's permission.

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