Yum! Brands: Time to Buy?

Yum! Brands (YUM) announced second quarter ended June 30, 2016 total revenue of $3.00 billion, down 3 percent year-over-year from $3.11 billion during the same period last year.

Yum! Brands declared second quarter of 2016 net income of $339 million or $0.81 per diluted share, up 44 percent year-over-year from $235 million or $0.53 per diluted share in second quarter of 2015.

The global fast foods company reported continued year-over-year decline in its top line mainly due to the negative impacts of unfavorable foreign currency translations.
However, Yum! Brands bottom line benefited from the year-over-year expanding company sales across all its key brands.

Strong growth

Yum! Brands illustrated a significant $499 million of total second quarter of 2016 EBIT, representing 16.6% of the quarterly EBIT margins as against 15.2% during first quarter of 2015 and better than the analyst’s key second quarter of 2016 margin estimate of 15.1%. The favorable year-over-year margin growth is primarily driven by superior commodity prices, healthy sales figures from same-store sales expansion achieved through KFC and better franchising during the quarter.

All the key divisions of Yum! Brands grew impressively both on sequential and year-over-year basis mainly due to expanding customer footfall at each of the company’s key brand franchises which is believed to further encourage Yum! Brands to continue to expand the number of growth units while offering attractive shareholder returns in form of dividends and strategic share repurchases.
Yum! Brands: Time to Buy?
Image by denvit / Pixabay
Further, since last year, KFC has grown its restaurant count by about 769 units while adding 132 new global restaurants across 42 nations.

Particularly, Yum! Brands has introduced 373 new restaurants globally for the quarter with 72% of worldwide development occurring in developing markets. However, the company’s key operational profit was poorly impacted by about $16 million owing to unfavorable foreign currency translations.

Despite the negative impacts of the news about Yum! Brands food affected by deadly viruses, the company is continuing to witness steadily improving profitability due to significant growth efforts being undertaken along with brand building exercises on their way that are believed to consistently deliver superior company profitability while delivering attractive shareholder returns in form of dividends.

Focusing on high-growth areas  

The strategic separation of Yum! Brands in two unique high-growth companies viz. Yum! New and Yum! China is expected to drive sustainable long-term company growth while delivering significant year-over-year expanding profitability. Yum! China is expected to have 77% share of KFC and 23% Pizza Hut share while, Yum! New would comprise of KFC (ex-China), KFC China, Taco Bell, Pizza Hut (ex-China) and Pizza Hut China each having 38%, 11%, 31%, 17% and 3% respectively. Going forward, Yum! China is estimated to deliver approximately 15% of EPS growth during 2017 while Yum! New projected to offer nearly 15% of total shareholder returns.

Yum! Brands is focused on delivering superior and industry-leading margins through these two independent, powerful and focused expansion companies. Yum! China is forecasted to illustrate 20% restaurant margin over the medium-term, deliver continued nearly 15% of EPS growth and demonstrate 3 times unit growth over the long-term. Going forward, Yum! New is estimated to get 96% franchised by the fiscal year ending 2017, deliver about 15% of continuing shareholder returns while offering 3 times the unit growth over the long-term. The shares of Yum! Brands are observed to have increased 18% year-till-date, but declined 5.1% for last one year compared to the S&P 500 index having grown 5.3% year-till-date.

The strategic separation of Yum! Brands into two iconic brands is believed to create two huge, uniquely well-structured, independent businesses having two superior investment profiles. Yum! China is a China Pure Play with focused investments in China, solid China appeal, notable China growth with approximately 15% of EPS expansion. Yum! New targets on delivering sustainable international growth, superior margin and a focused worldwide franchise company with an objective to deliver nearly 15% of shareholder returns.

Conclusion

Overall, the investors are advised to “Buy” equity in Yum! Brands, Inc. considering the company’s significant near-term and long-term growth prospects with satisfactory and industry-leading PEG ratio of 2.02. The profit margin of 10.97% also seems impressive. However, Yum! Brands needs to optimize its debt-burdened balance sheet with significant total debt of $5.36 billion against weaker total cash position of $795 million only, restricting the company to make future growth investments.
Published on Sep 9, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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