Consumer Sector Ideas

[gfp927z]

Yum Brands -- >>> Heartburn And Heartache Ahead: Sour Taste For Yum After Growth Worries



Forbes

Nov 30, 2012


http://www.forbes.com/sites/abrambrown/2012/11/30/heartburn-and-heartache-ahead-for-yum-sour-taste-for-stock-after-growth-worries/?partner=yahootix




Yum! Brands‘ consistent growth and expansion into China have made the stock a tasty delight. Investors today, though, are likely left with a sour taste after the company warned about a slowdown in Asia. Increased wariness—and some profit taking—seems rightly warranted.

Yum, operator of Taco Bell, Pizza Hut and KFC restaurant chains, forecast a 4% fall in fourth-quarter China same-store sales, an effective measure of financial health, as well as popularity, because it strips away volatile results from newly opened or closed locations. How significant is this? A year ago, Chinese same-store sales rose 22%.

China is key to Yum, and this forecast is distressing. The country represents more than half of Yum’s annual profits (roughly $660 million), and Yum aims to open at least 700 new locations there in 2013. It’s an untenable situation; the Chinese economy is cooling, and income growth isn’t likely to be as substantial as in past years. Moreover, the situation might be worse than Yum predicts: Deutsche Bank analyst Jason West sees the slowdown in same-store sales nearer 6% than 4%.

Other Yum competitors aren’t as heavily tied to the fortunes in China. Only around 4% of McDonald’s ($1.1 billion) and Starbucks ($530 million) profits come from there. That leaves them positioned to outperform Yum in the immediate future.

“We remain concerned about fundamentals in the core China business, and think Street estimates for about 15% growth in earnings per share in 2013 do not fully reflect this risk, ” says Jeffries analyst Andy Barish.

Shares of Yum fell 9.5% in early morning trading.

From a valuation perspective, the selloff makes sense. The stock yesterday closed at $74.40, shortly before Yum detailed the forecast—a long-range outlook that also included a prediction of 13% earnings growth this year and 10% or more next year—in after-hours trading. At that price, the shares traded close to 23.5 times forward earnings. That valuation is among the richest that the stock has received in the past two decades, and the stock hasn’t crested 24 times earnings since 2007.

Next, look at another useful metric: the enterprise multiple. (This comes from enterprise value/earnings before interest, taxes, depreciation and amortization.) It’s a favorite of bottom-up stock pickers, like Warren Buffett, and it’s also what an acquirer would use to value a company. Importantly, debt is analyzed—a financial constraint that doesn’t show up in the P/E ratio.

After today’s slide, Yum has an enterprise multiple of 11.6. That’s near the top of the past five years. (Yum holds nearly $3 billion in long-term debt.) For contrast, McDonald’s enterprise multiple is 9.5, beneath where the stock has recently traded; Cheesecake Factory’s multiple is 7.9 and Wendy’s is 8.9. Burger King, newly public after a leveraged buyout that loaded on $3 billion in long-term debt, sports an enterprise multiple higher than even Yum: 13.2.

Coming up: a meeting in New York, on Dec. 6, where Yum executives will detail company strategy leading into next year. Market participants will be looking for trouble, and any comments that could possibly be viewed as bearish could mean renewed pressure on the stock.

<<<