Friday, May 7, 2010

Is It Too Late To Feel YUMmy:

5/7/2010 – Yum! Brands Inc.

Price - $39.61

52 Week Range - $31.54 - $44.00

Market Cap – 18.52 Billion

P/E – 17.54

EPS – 2.26

Dividend Yield – 2.1%

As over 16 million Americans tuned into the Kentucky Derby on Saturday, May 1st they could not have helped but notice the barrage of commercials and acknowledgements of promotion from Yum! Brands Inc (YUM). From individual commercials for KFC to Yum specific commercials that left viewers unsure what was being advertised to giant Yum logos on the horse saddle blankets. Yum tried to make its mark everywhere and nearly succeeded, but what’s interesting is the generic-ness of their ads. Does the normal American know what they are referring to if they say go eat at a Yum restaurant? Or are they looking to push their stocks? Several of the commercials were followed with a not so ambiguous NYSE: YUM.

The preceding were the thoughts I was having during the derby. The following were afterthoughts: why is the CNBC Call the Close winner not me, and why is he so short and soo fat and sooo lucky; why does Calvin Borel sound like a drunken confederate throwback and why am I so excited whenever he gives an interview; why did I not have the testicular fortitude to put a C-note of Super Saver who I picked him the Wednesday before the race but was very hesitant over it because of the track conditions and because my previous favorite horse has let me down twice in two months (thanks Rachel, who does in fact run very well in the slop (Haskell))? But I digress…

On to the meat, well, chicken, tacos, root beer, weird pizza, and fried sea food. The following graph will show the ridiculous couple of months that Yum has been having. It reached it low in Q4 2008 at around $21.50, spiked to close the year and dipped again in Q1 2009 to $22. It was then met by 3 quarters of bouncing within a $4 range in the area of $33 to $37. But since February we have seen $10 rise to the $43 range which leaves one with the question, how high is too high to buy, and how long will this bull run. Of course with the turmoil of this week; i.e. Greece falling apart in riots, BP failing to maintain the Transocean Ltd oil spill in the Gulf, and the biggest intraday drop the Dow has every seen on Thursday the 6th; Yum’s fundamentals look more and more appealing. What’s also good about this news is that little of it should affect YUM. The oil spill could put a short term rise in prices to on the inputs at Long John Silver but it will be very minimal in the overall scheme of things considering the number of LJS’s to the number of KFC’s and Pizza Huts. Unfortunately the cost of proteins are also rising which could hit the entire fast food market. With all of the aforementioned turmoil Yum fell to $39 breaking the fairly weak channel seen here. But the fact that it did rebound is very bullish from a technical standpoint. Using the previous yearlong channel we can take this range and add it to the upperband presenting a new channel with a rough range of $38 - $44 (not shown).

On the promotional front, we’ve already discussed the whoring at the Kentucky Derby, but just recently Yum has purchased the rights to the name of the former Downtown Louisville Center, now KFC Yum! Center. Additionally there has been the introduction of a new sandwich at KFC called the Double Down, offered in both original crispy and grilled, that features two pieces of chicken as the bun of a bacon and cheese sandwich. For now its price is a bit high but it should be making a killing until the novelty wears off. Taco Bell and Pizza Hut are doing the opposite in offering drastic price drops on a number of items. Pizza Hut is also sponsoring the pre game and intermissions of Versus hockey coverage. This hits about 3-4 million people of a good weeknight.

What could very well be the most important factor in determining Yum’s future growth prospects is its overseas expansion. Right now China is the biggest market to Yum outside of the United States with over 3,500 units, over 80% of which are KFC’s. But the first Taco Bell in India has just been opened with more to follow. Of course this is a giant market that needs to be capitalized on. This has been proven with the rapid expansion of Pizza Hut’s and competing Domino’s. As of 2007 there were roughly 150 of each and now Domino’s has hopes of taking this number to 700 in the next few years. If the Taco Bell is a hit then it is totally conceivable that we will see 400-500 units in the next 10 years.

Right now the average analyst price target for Yum is at $46 which could be achieved very shortly. Unfortunately Yum is an underachiever from May through September, but this means buy points may unveil themselves within this period. Earnings per share growth has been very strong over the last 5 years and the 2% dividend is nothing to write home about but it’s slightly better than the 1.6% Wendy’s/Arby’s or the 0% from Domino’s. There are not many major players in the fast food industry, but Yum is certainly the second best available behind the over priced McDonald’s. And with the restaurants Yum represents it’s almost automatically diversified. For these reasons we, like the analysts give a buy on Yum with emphasis on long term capital appreciation.


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