About Yum! Brands
I received my final grades of the Spring 2023 semester, summer was now in session and it was time to absolutely pig out.
It was also one of the few instances where it was raining cats and dogs in Austin, Texas.
What a strange day.
At any rate, I remember it so clearly.
I was on the bus heading home and the rain and hail came down like madness for ten or so minutes, forcing what would usually be a fifteen-minute bus ride to all of the sudden become a thirty-minute ride, with the bus slowly creeping up Lavaca, heading northbound out of downtown back to my humble abode.
Austinites that use public transit, you probably know exactly what and where I am talking about.
If you don’t happen to fall into that category, we advise that you use your imagination.
At any rate, I get home and swiftly begin pondering a celebratory meal and, for some reason or another, Kentucky Fried Chicken (KFC), a fast-food chain that I hadn’t eaten at in years prior to that day sounded so good.
So, I did what any (ab)normal person would’ve done and waited for the rain to settle, jumped into my car, drove a mile or so to the nearest KFC, ordered a $32 meal that was (and still is) more than likely reserved for small parties or families (don’t judge, it was a rough semester), featuring fried chicken, macaroni and cheese, mashed potatoes and a giant soft drink to top it all off.
I roll through the drive-thru, pick up my meal for my “family” and proceed to drive home, picking apart the bag, said a prayer and proceeded to get down to business.
I kid you not, after letting my appetite build for hours prior to the meal, I took a few minutes, enjoyed the fried chicken and mash potatoes and mac and cheese and suddenly found myself exhausted and stuffed.
To make a longer story short, the night ended with me feeling mildly sick and putting away the rest of the food for the morning.
Make no mistake, I am certainly not blaming KFC for this, as I was intent on eating a large meal rather quickly and didn’t really take the time to weigh the consequences.
But, hey, leftovers!
So why all of the fuss regarding Kentucky Fried Chicken? Because it just so happens to be one of Louisville, Kentucky-based Yum! Brands’ prized possession subsidiaries, along with a few other brands you more than likely know pretty well within the fast-food segment, including Taco Bell, Pizza Hut and The Habit Burger Grill.
Talk about brand power, folks, as this casual dining conglomerate and its associated brands are indisputable staples within the dining sector, not to mention the fact that practically anywhere within or around an urban, metropolitan setting as well as right off of what feels like any interstate exit, you can find a Yum! Brand restaurant unit in a matter of minutes, if not seconds.
Now, when it comes to our view of the fast-food leadership board, it is our opinion that McDonald’s alone is the cream of the crop given its branding alone, its excellent marketing tactics, its precision low pricing and its ubiquity, as it feels as though you can find the Golden Arches just about anywhere.
With that, there are some fierce competitors that butt heads with Ronald McDonald himself, including fast casual dining conglomerates such as Yum! Brands along with Restaurant Brands International, which is home to Burger King, Popeyes and a few other notable brands along with other focused oppositions such as the Wingstops and other speciality fast-food establishments of the world (Domino’s also comes to mind) as well as the smaller, more local chains that are favored by, well, locals, and that indisputably take some business away from the aforementioned fast-food leaders.
Nevertheless, simply from a consumer perspective we think that Yum! Brands maintains a few notable advantages in that they have immense brand power and are also able to serve the masses in terms of demographics, geographies along with categories as well, as millennials favor Taco Bell along with other demographics and KFC, Pizza Hut and The Habit are well received by the public overall, not to mention that essentially all of these brands naturally offer relatively low price points to consumers, largely insulating this company from greater overall pressures that may hit other companies and/or industries harder.
With all of the tightened budgets out there, many are likely to flock to one or more of Yum!’s brands for a more cost-friendly meal.
Now, it’s about that time to dive into this company’s core financial figures and metrics so as to determine whether or not one should consider an investment in this company’s stock (NYSE: YUM).
Let’s Taco ‘bout it.
Sorry, we felt as though we had to go there, and we did.
Yum!’s stock financials
First and foremost, Louisville, Kentucky-headquartered Yum! Brands has a current market capitalization of $36.9 billion with an accompanied share price of $131.69 along with a price-to-earnings (P/E) ratio of 26.06 and an annually issued dividend of $2.42 to its shareholders, which isn’t all that bad of a start, however, our initial impressions lead us to believe that this conglomerate isn’t growing all that fast, which, if this is true, leads us to conclude that this company’s stock (NYSE: YUM) is trading at a premium relative to its actual, intrinsic worth (i.e., it is commonly held that a P/E of 20 indicates that a stock is trading at exactly fair value and anything higher implies that it is overvalued) and thus it isn’t worth overpaying for, that is, if it isn’t growing, which, on the other hand, very well might not be the case given the company’s somewhat recent adoption of technology and other relevant revenue growers, one example being the company’s deals with third-party delivery platforms such as DoorDash and Uber Eats, which are almost certainly adding to this company’s top-line growth, again, if there is any growth to be found.
With respect to the condition of the company’s balance sheet, Yum!’s executives are tasked with tending to and taking care of approximately $5.8 billion in terms of total assets along with around $14.7 billion in terms of total liabilities, which is somewhat troubling from our perspective given that this company’s cumulative amount of total liabilities is far greater than that of its assets.
However, if there is any silver lining it is the fact that it is far from uncommon for fast-food companies (especially those that have scaled and Yum! Brands is practically the definition of scale in the context of the fast-food sector) to have incurred a fair amount of debt and total liabilities given the high costs incurred in planting new stores across the globe at a rapid rate, much of these liabilities likely ingrained in this company’s rather extensive real estate development portfolio, which is just a long game in and of itself.
Also, it apparently isn’t all too uncommon for some of its other general, casual dining competitors, as pizza giant Domino’s has an upside-down balance sheet (i.e., more total liabilities than total assets), which certainly doesn’t justify anything but rather puts things into some context.
So long as this company can hew down its total liabilities over time or at a minimum keep its total liabilities in a manageable state (i.e., doesn’t overleverage the company to a point of no return), we aren’t all too concerned, but it is definitely something to note with this company.
Regarding the company’s income statement, Yum!’s total annual revenues since 2018 have been fairly consistent, which is both what we were expecting (to a certain degree) and a positive overall, however, with all of the growth levers this company has been pulling and continues to pull, we expected this company’s revenues to have experienced a little more growth.
Nevertheless, it’s great that this company kept its top-line in top condition during the onset and progression of the COVID-19 pandemic, as many customers likely ordered through the aforementioned third-party delivery platforms Yum! Brands partnered with and is still partnered with today.
Again, however, this company’s recent historic revenue has been a little too boring for our liking, even though we enjoy its consistency and stability.
As a sort of reference, the company’s total annual revenue on a year-over-year (YOY) basis between 2018 and 2022 remained in and ever so slightly around $5 billion and $6 billion, which speaks to the company’s digital adaptation (particularly during 2019 and 2020) and its inherent value proposition in that its menu items across all of its chains and subsidiaries are still relatively viewed as being affordable and comparably inexpensive.
Onto the company’s cash flow statement, Yum! Brands’ net income and total cash from operations have been nearly perfectly consistent and positive during the same time period, which indicates to a certain extent that this conglomerate can do some damage in the trailing twelve month (TTM) net profit margin department.
Shall we?
Of course we shall.
Yum!’s stock fundamentals
According to the figures displayed on TD Ameritrade’s platform, Yum! Brands’ TTM net profit margin sits at 20.31% to the industry’s respective listed average of 7.78%, which, evidently is a material difference in one’s ability to generate a TTM net profit margin, favoring this famed leader of the fast-food, casual dining space.
This discrepancy can more than likely be attributed to a few different things, including but certainly not limited to it having the brand(s) it has, the relationships with its suppliers other more local, smaller restaurants or restaurant chains might not have (i.e., Yum! Brands could be leveraging some pricing power in this regard, beefing up its margins in the process) as well as perhaps, as simple as it may sound, the cost of the food(s) it sells might not be all that expensive, also naturally adding a sort of buffer to its TTM net profit margin and margins overall.
Given the general state of its balance sheet (particularly its aforementioned total assets-total liabilities breakdown), it is a resounding positive that this company has a knack for producing a substantial amount of cash flow.
As it relates to the company’s TTM returns on both assets and investment(s), Yum!’s outpace the industry’s respective averages by long shots as well, for instance, with the company’s TTM return on assets listed at 24.4% to the industry’s respective average of 0.56%, indicating that this restaurant conglomerate does an exceptional job at extracting returns on, in simplistic yet objectively correct terms, making a return on the assets that it owns, real estate perhaps being one of their largest, most valuable assets.
Should you buy Yum! Brands stock?
In a way, we have already seen this storyline before.
While quite cash flow generative, well known among the masses for both its general brands as well as its more often than not delicious dishes, not to mention its stable year-over-year revenues in recent history, we do have some concerns with respect to this company’s balance sheet, as it is seemingly leveraged to a slightly worrisome degree, from our vantage point, at least.
Nevertheless, an unequivocal positive that lies within this company and its business model is that it is well insulated from greater overall recessionary pressures, which makes sense, again, given this company and its brands’ inherently lower price points, as regardless of the state of the economy, many will still be able to afford getting a taco from Taco Bell or a pizza and some wings from Pizza Hut even when there wallets get pinched, regardless if it is a smart, prudent fiscal decision in the first place.
Combining all of the previous information, metrics, ratios and figures, if this company’s stock (NYSE: YUM) was trading at a discount relative to its intrinsic value, we might hold a different perspective on this company as an investment, but for the time being, with a stock that is slightly overvalued on the basis of its price-to-earnings ratio, we don’t view Yum! Brands’ stock as an investment worth pursuing at the moment, at least, for those who don’t already maintain an ownership stake in the company already.
Thus, the “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.