Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Yum Brands fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â YUM! Brands, Inc. (YUM) is a quick service restaurant company based on number of system units, with over 39,000 units in more than 125 countries and territories. The Company, through three concepts of KFC, Pizza Hut and Taco Bell (Concepts) develops, operates, franchises and licenses a worldwide system of restaurants, which prepare, package and sell a menu of priced food items. The Company operates in six segments: YUM Restaurants China (China or China Division), YUM Restaurants International (YRI or International Division), Taco Bell U.S., KFC U.S., Pizza Hut U.S. and YUM Restaurants India (India or India Division). The China Division includes mainland China, and the India Division includes India, Bangladesh, Mauritius, Nepal and Sri Lanka. YRI includes the remainder of its international operations.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$39.22|
|Value Based on 0% Growth||$22.99|
|Market-Implied Growth Rate||10.05%|
Balance Sheet – 12/29/2013
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
Yum Brands does not qualify for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor is turned away by the low current ratio, and the high PEmg and PB ratios. Â The Enterprising Investor does not like the high level of debt relative to the company’s current assets. Â As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities, such as by reviewingÂ Â 5 Outstanding Dow ComponentsÂ andÂ 5 Low PEmg Companies for the Enterprising Investor. Â From a valuation perspective, the company appears overvalued. Â The company’s EPSmg (normalized earnings) have only grown from $1.88 in 2009 to $2.70 for 2013. Â This low level of historically demonstrated growth does not support the market’s implied estimate for earnings growth of 10.05%, and the ModernGraham valuation model estimates an intrinsic value that is well below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Yum Brands Inc. (YUM)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Yum Brands Inc. (YUM) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.