Posted: Dec 08, 2009 11:02 AM by Ryan C. Fuhrmann
Yum! Brands (NYSE:YUM), owner and operator of the Pizza Hut, KFC and Taco Bell restaurant franchises, provided an update on its sales and profit outlook over the next couple of years. The guidance was certainly appetizing, but the current share price valuation leaves something to be desired.
In a press release Friday prior to Yum!’s upcoming annual shareholder meeting, management reiterated fiscal 2009 earnings growth guidance of 12%, excluding what it deems to be “special” one-time items and related charges. Last year, Yum! Reported full-year earnings of $2.03 per share and analysts are currently projecting 2009 earnings of $2.15 per share. Yum! also provided 2010 guidance and said to expect 10% earnings growth and another 1,400 stores internationally. Profit targets consist of 15% in China, 10% in other international and 5% in the U.S.
Growth from the current year will continue to stem from China and the rest of its international geographic expansion opportunities where it collectively expects to open 1,400 new restaurants for the full year. However, the company is still having difficulties keeping same-store sales growth positive and indicated this is the company’s “biggest challenge … in a difficult consumer environment.” As such, Yum! will rely on new stores to keep expanding the top line and other cost-saving initiatives to keep profits chugging along. Specifically, Yum! said to expect 9% sales growth in China, 5% at its other international locations, and a comparable sales decline of 4% in the U.S. Overseas growth excludes currency fluctuations.
Based off current analyst expectations for the full year, shares of Yum! trade at a forward P/E of just under 16. The multiple has come down slightly as Yum!’s fourth quarter outlook came in below analyst expectations and sent the stock lower after the press release. Based off forward free cash flow projections, Yum! trades at a forward multiple of just over 20, which implies that the company will need to grow free cash flow in the double digits for the next decade just to justify where the shares trade currently. That’s a rather aggressive target that doesn’t leave much room for downside protection should international growth prospects dim or domestic trends deteriorate further. (Learn more about free cash flow, read Free Cash Flow: Free, But Not Always Easy.)
That being said, along with the Golden Arches, Yum! offers investors a rare opportunity to participate in overseas fast-food restaurant growth. Other players, such as Burger King (NYSE:BKC), which has only a small international presence, and Chipotle Mexican Grill (NYSE:CMG) (NYSE:CMG.B) and Wendy’s (NYSE:WEN) currently operate only domestically. At under $30 per share, Yum! would offer a much more appetizing risk/reward tradeoff.
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