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 companyÂ or by reviewing theÂ 10 Companies Benjamin Graham Would Invest In Today -Â July 2016.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 stock analysis showing a specific look at how Yum! Brands Inc (YUM)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): YUM! Brands, Inc. (YUM) is engaged in restaurant business. The Company develops, operates, franchises and licenses an across the world system of restaurants, which prepare, package and sell a menu of food items, primarily through the three concepts of KFC, Pizza Hut and Taco Bell (the Concepts). YUM operates through four segments: YUM China (China Division), which includes all operations in mainland China; The KFC Division, which includes all operations of the KFC concept outside of China Division; The Pizza Hut Division, which includes all operations of the Pizza Hut concept outside of China Division, and the Taco Bell Division, which includes all operations of the Taco Bell concept. Taco Bell operates in over 20 countries and territories throughout the world. The Company has over 42,000 restaurants in over 130 countries and territories. The Company’s three Concepts focus on the chicken, pizza and Mexican-style food categories, respectively.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of YUM – August 2016
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$34,497,236,031||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.82||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||50.17%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||29.78||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||-94.78||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||0.82||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-13.31||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||1.14%|
|MG Value based on 3% Growth||$43.06|
|MG Value based on 0% Growth||$25.24|
|Market Implied Growth Rate||10.64%|
|% of Intrinsic Value||276.35%|
Yum! Brands, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.76 in 2012 to an estimated $2.97 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 10.64% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Yum! Brands, Inc. revealed the company was trading above its Graham Number of $0. The company pays a dividend of $1.79 per share, for a yield of 2% Its PEmg (price over earnings per share – ModernGraham) was 29.78, which was below the industry average of 30.22, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-16.05.
Yum! Brands, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D+.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$16.05|
|Number of Consecutive Years of Dividend Growth||13|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||6/1/2016|
|Total Current Assets||$1,879,000,000|
|Total Current Liabilities||$2,279,000,000|
|Shares Outstanding (Diluted Average)||417,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.56|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$2.97|
Other ModernGraham posts about the company
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The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.
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