Finance #
Over the last several years, a number of changes have been occurring in the world of business. Part of the reason for this, is because globalization has been creating a transformation in the way corporations are increasing their profits. At the heart of this basic strategy, is the focus on emerging markets. As, countries such as China and India will become economic powerhouses, that are capable of providing consistent economic growth in the future. While many Western nations (i.e. The United States) are seeing declines in population growth. This means that many established corporations have begun to focus on increasing their profit margins in these areas of the world. In the case of Yum Brands, they have been engaging in a similar strategy. As they have been focusing on, aggressively increasing their profits in these regions. To achieve this objective we will conduct an: examination of the company, the fundamentals and stock price. Together, these different elements will provide the greatest insights as to the how the company has been changing it business model to reflect the transformations that are occurring.
Company Overview
Yum Brands is involved in the fast food industry. Their main focus is on those restaurants that are the most popular with the general public. Meaning that the kinds of products that they are marketing are: known for their name and reputation. This helps the company to be able to increase their revenue growth by focusing on: operating, expanding and franchising the different restaurants they own in areas that will maximize their profit margins. The different franchises include: Pizza Hut, Taco Bell, KFC, Long John Silver’s and A&W All American. The segments of the industry that Yum specializes in includes: chicken, Pizza (Italian food), specialty seafood and Mexican. The corporation has operations in 110 countries around the world. A few of the most notable include: China, India, Nigeria, Ghana, Vietnam, Russia, Cambodia, Pakistan, Brazil and the Caribbean just to name a few. While the company’s headquarters, are located in Louisville, Kentucky. This is significant, because it is showing how Yum Brands has been aggressively focusing on growing their business through: concentrating on those regions that increase their profit margins as much as possible (the developing economies). (“Yum Brands,” 2010)
Ratio Analysis
In the ratio analysis we are going to be examining the trends in the stock. This will be accomplished by comparing a number of different financial ratios over the last three years. The most notable include: the price / earnings (PE) ratio, earnings per share (EPS) and the debt ratio.
The PE ratio will tell how expensive the price the stock is in relation with the historical prices. In general, when you see higher PE ratios this is a sign that the company is beginning to experience above average growth. In the case of Yum Brands, they have been seeing consistently rising earnings based upon: the increasing PE ratio over the last three years. The below table is highlighting the different PE ratios from 2008 to 2010.
Yum Brands PE Ratio from 2008 to 2010
Year
PE Ratio
2008
18.22
2009
20.27
2010
21.73
(“Yum Brands,” 2010)
This is important, because it is showing the underlying strength of the company’s earnings.
The debt ratio will identify the ability of the company to: have access to financing in the public markets and what part of the expansion overseas is being funded with various loans. This will identify if: the long-term rate of growth is sustainable and any possible financial challenges down the road. In the case of Yum Brands their debt ratio is considered to be relatively low and remaining at these levels. The below chart illustrates the debt ratio for the company over the last three years.
Yum Brands Debt Ratio from 2008 to 2010
Year
Debt Ratio
2008
21.3%
2009
22.9%
2010
22.5%
(“Yum Brands,” 2010)
These different figures are important, because they are showing how the corporation has been financing their growth over their last three years from actual earnings.
Based on the above information, it is clear that in the next three years, Yum Brands will continue to see: increasing PE and stable debt ratios. These different elements will help the price of the common stock to steadily increase. This is indicting (from a valuation standpoint) that the company has rising earnings momentum based on strong fundamentals.
To corroborate these views we will be using fundamental analysis as the forecasting method. This is when are looking at how various financial and economic factors could have an impact on the value of the stock. (“Fundamental Analysis,” 2011) To determine the strength of Yum Brands we will be using a number of different tools. To include: the current assets, fixed assets, current liabilities, long-term liabilities, owner’s equity, sales revenues, earnings before taxes and interest (EBIT) and earnings per share (EPS). This will be accomplished by performing a trend analysis for: 2008, 2009 and 2010. Then, making projections of future growth rates in: 2011, 2012 and 2013. Once this takes place, it will provide insights about the sustainability of current growth rates for the company.
Current Assets
Year
Current Assets
2008
$1.1 billion
2009
$1.2 billion
2010
$2.3 billion
(“On the Ground Floor of Global Growth,” 2010)
There has been a sharp increase in the current assets over the last three years with: an average rate of growth of 50.5%. Below are the projections for the continuation of the trend based upon this number.
Current Asset Estimates
Year
Current Assets
2011
$3.4 billion
2012
$5.1 billion
2013
$7.6 billion
(“On the Ground Floor of Global Growth,” 2010)
These projections are indicating continuing upward momentum in current assets over the next three years.
Fixed Assets
Year
Fixed Assets
2008
$6.3 billion
2009
$7.1 billion
2010
$8.3 billion
(“On the Ground Floor of Global Growth,” 2010)
The average rate of growth in fixed assets over the last three years has been 14.75%. Below are the future projections for Yum Brands using this number.
Fixed Assets Estimates
Year
Fixed Assets
2011
$9.5 billion
2012
$10.9 billion
2013
$12.5 billion
(“On the Ground Floor of Global Growth,” 2010)
This is a sign that the steady upward momentum in the fixed assets will continue over the next three years.
Current Liabilities
Year
Current Liabilities
2008
$1.2 billion
2009
$1.6 billion
2010
$2.4 billion
(“On the Ground Floor of Global Growth,” 2010)
The average increase in current liabilities is 41.6% over the last three years. This is a signal that as the company is expanding their current liabilities as they are growing.
Current Liabilities Estimates
Year
Current Liabilities
2011
$3.4 billion
2012
$4.8 billion
2013
$6.7 billion
(“On the Ground Floor of Global Growth,” 2010)
This is showing how as the company moves, into many developing countries the current liabilities will continue to increase.
Long-Term Liabilities
Year
Long-Term Liabilities
2008
$5.7 billion
2009
$6.0 billion
2010
$6.6 billion
(“On the Ground Floor of Global Growth,” 2010)
The average increase in long-term liabilities is 7.0%. This is a sign that the company is financing their growth with actual earnings. The below table illustrates how this number will increase in the next three years.
Long-Term Liabilities Estimates
Year
Long-Term Liabilities
2011
$7.2 billion
2012
$7.7 billion
2013
$8.2 billion
(“On the Ground Floor of Global Growth,” 2010)
These numbers are highlighting how there will be a gradual increase in the long-term liabilities between 2011 and 2013.
Equity
Year
Equity
2008
$883 million
2009
$1.0 billion
2010
$1.5 billion
(“On the Ground Floor of Global Growth,” 2010)
Over the last three years shareholder equity has increased by an average of 35.8%. Below are the projections for this number between 2011 and 2013.
Equity Estimates
Year
Equity
2011
$2.0 billion
2012
$2.7 billion
2013
$3.6 billion
(“On the Ground Floor of Global Growth,” 2010)
These figures are indicating that the company will provide shareholders will consistent returns on the investment capital they are provide with.
Revenues
Year
Revenues
2008
$9.7 billion
2009
$9.4 billion
2010
$9.8 billion
(“On the Ground Floor of Global Growth,” 2010)
The average revenue growth rate of Yum Brands is 1.0%. This takes into account a 3.0% decline between 2008 and 2009. Below are the future projections for revenues over the next three years.
Revenue Estimates
Year
Revenues
2011
$9.9 billion
2012
$10.0 billion
2013
$10.1 billion
(“On the Ground Floor of Global Growth,” 2010)
This is indicating that the company will experience consistently increasing sales revenues between 2011 and 2013.
Earnings Before Interest and Taxes
Year
Earnings Before Interest and Taxes
2008
$1.2 billion
2009
$1.3 billion
2010
$1.5 billion
(“On the Ground Floor of Global Growth,” 2010)
The average EBIT that Yum Brands has been experiencing is 10.15%. The below table is: showing the projected growth rate in this number over the next three years.
Earnings Before Interest and Taxes Estimates
Year
Earnings Before Interest and Taxes
2011
$1.6 billion
2012
$1.7 billion
2013
$1.8 billion
(“On the Ground Floor of Global Growth,” 2010)
These figures are highlighting how the company will see continued growth in EBIT over the medium term.
Net Income
Year
Net Income
2008
$964 million
2009
$1.0 billion
2010
$1.1 billion
(“On the Ground Floor of Global Growth,” 2010)
The average rate growth in net income is 6.5%. The below table is illustrating the different projections over the next three years.
Net Income Estimates
Year
Net Income
2011
$1.17 billion
2012
$1.87 billion
2013
$1.99 billion
(“On the Ground Floor of Global Growth,” 2010)
These figures are highlighting how the net income will be consistently increasing between 2011 and 2013.
Earnings Per Share
Year
EPS
2008
1.91
2009
2.17
2010
2.53
(“Yum Brands,” 2010) (“On the Ground Floor of Global Growth,” 2010)
The average rate of growth for the EPS is 15.05%. The below table is: showing how these numbers are expected to increase in the future.
Earnings Per Share Estimates
Year
EPS
2011
$2.78
2012
$3.19
2013
$3.67
(“On the Ground Floor of Global Growth,” 2010)
These figures are highlighting how the company will continue to see increases in the EPS between 2011 and 2013. This information is important, because it is showing how Yum Brands has the ability to increase their earnings based upon: their strategy of focusing on developing markets.
Stock Price Analysis
The price of the common stock over the last five years indicates the company has consistently strong earnings. This is supporting the fundamental factors that were discussed previously. Evidence of this can be seen by comparing the price of the stock with the performance of the S&P 500 in the below chart.
These different elements are important, because they are showing how the stock is at an all time high. As it has broke through resistance levels to establish new areas of the support. Evidence of this can be seen with support in the $54.00 range, while resistance is $56.98. These factors are significant, because they are illustrating how the company has rising earnings momentum. Therefore, given the trends, it would not be surprising to see shares test $80 over the next three to five years. (“Yum Brands,” 2010)
Bibliography
2010 Annual Report. (2010). Yum Brands. Retrieved from: http://www.yum.com/annualreport/
Fundamental Analysis. (2011). Investopedia. Retrieved from: http://www.investopedia.com/terms/f/fundamentalanalysis.asp
On the Ground Floor of Global Growth. (2011). Yum Brands. Retrieved from: http://www.yum.com/annualreport/downloads/pdf/2010AnnualReport.pdf
Yum Brands. (2011). Yahoo Finance. Retrieved from: http://finance.yahoo.com/q?s=YUM&ql=1
Yum Brands. 10K. Yum Brands. Retrieved from: http://investors.yum.com/phoenix.zhtml?c=117941&p=irol-SECText&TEXT=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDEwNDEwNjEtMTEtMDAwMDA5L3htbA%3d%3d
Graham, B. (1976). The Intelligent Investor. New York, NY: Random House.
Weinstien, S. (1988). The Secrets for Profiting in Bull and Bear Markets. New York, NY: Simon and Schuster.
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