This Stock is Quite Yummy

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Crypto is crashing…real estate is declining…and stocks can’t catch a bid. 

It seems like there isn’t much the Fed can do to stop inflation. 

Is it time to get out of the market, or are there stocks out there that can weather the storm?

Believe it or not, fast-food stocks have historically done well during recessions. 

One of those stocks is YUM Brands. 

Despite landing at number six amongst financial pros restaurant stock searches, Yum Brands demolishes the competition when it comes to growth and margins.

That’s why we found it so surprising it didn’t garner more searches.

But we think that folks may be missing out. And here’s why…

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Yum’s Business

YUM has over 54,000 restaurants in more than 155 countries. 

The company’s main brands include KFC, Pizza Hut, and Taco Bell. As well as, The Habit Burger Grill. 

YUM breaks its revenues down to company sales, franchise and property revenues, franchise contributions for advertising, and other services. 

Despite a difficult economic environment, the company announced a record of 997 gross units were opened during Q1 2022. In addition, it reported digital sales of approximately $6 billion, a 15% boost year-over-year with a digital mix exceeding 40%

Financials

Inflation is at its worst level in about 40 years. The place where it hits consumers the most is at the gas pump and grocery store. 

However, that has yet to impact YUM negatively. In fact, its system sales grew 8%, and set a Q1 development record, opening nearly 1,000 gross units.  

Plus, the company has held gross margins at 48%.

YUM  is on pace to have its highest revenues since 2016, and its highest earnings per share in over a decade. 

In fact, it grew revenue (YoY) by 13.11%, which is below its 5-year average of 17.09%, but still pretty solid.

One of the metrics investors care a lot about in this market environment is free cash flow. That’s the cash a company has left over after it pays for operating expenses and capital expenditures. YUM has been able to double its free cash flow from $712 million in 2017 to $1.47 billion in 2021. 

YUM has total debt of $12.2 billion. And is sitting on $365 million in cash. Meanwhile, the company has a market cap north of $32.6 billion. 

Furthermore, the company believes its stock is undervalued at these levels. It repurchased 3.4 million shares totaling approximately $407 million during Q1 2022. 

And not only did YUM buy back shares in Q1 2022, but it also continues to reward shareholders via a stock dividend payout. The company pays its shareholders an annual dividend of $2.28 per share. 

YUM has a current ratio of 1.08x, which means its current assets are large enough to cover its current liabilities. 

Valuation

While YUM runs a highly profitable business it appears to be fairly priced. 

The company has a P/E ratio of 20.79x, which is more or less in line with other companies in the S&P 500. Still, YUM’s P/E ratio is below its 5-year average of 25.23x.  

YUM has a return on assets at 23.05%, which is absolutely incredible when compared to some of its peers: MCD 12.43%, CMG 8.49%, and QSR 5.35% 

Furthermore, from a gross profit margin perspective, YUM at 48.01% beats CMG 37.95%, QSR 41.69%, DRI 21.45%, and WEN 46.79%. 

One advantage YUM competitors have is better growth numbers. Firms like CMG, DRI, and MCD have experienced better revenue growth (YoY) and EBITDA growth (YoY).  

Our Opinion – 7/10

Yum Brands is expanding globally despite fears of an economic slowdown. And while inflation and higher interest rates are a concern, the company has been able to buy back stock and keep its dividend intact. 

Shares of YUM are down with the rest of the market. But we believe it’s a good place to park your money given the relatively low P/E ratio, and the company’s ability to execute its game plan. 

We like the stock over the next 12-24 months.