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 Stocks for Using A Benjamin Graham Value Investing Strategy – August 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’s segments include 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. As of September 3, 2016, the Company had approximately 43,000 restaurants in 135 countries and territories, through the concepts of KFC, Pizza Hut and Taco Bell. The Company’s concepts are focused on the chicken, pizza and Mexican-style food categories, respectively.
Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation. Â In addition,Â here is a post detailing what can be found within each individual company’s valuation.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$23,528,968,924||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.74||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||57.17%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||20.43||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||-13.32||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||1.74||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||5.35||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||1.88%|
|MG Value based on 3% Growth||$45.04|
|MG Value based on 0% Growth||$26.40|
|Market Implied Growth Rate||5.97%|
|% of Intrinsic Value||166.64%|
Yum! Brands, Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.76 in 2012 to an estimated $3.11 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 5.97% 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 $1.84 per share, for a yield of 2.9%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 20.43, 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 $-20.92.
Yum! Brands, Inc. receives an average overall rating in the ModernGraham grading system, scoring a C+.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$20.92|
|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||9/1/2016|
|Total Current Assets||$4,003,000,000|
|Total Current Liabilities||$2,299,000,000|
|Shares Outstanding (Diluted Average)||398,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.97|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$3.11|
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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.