Yum Brands - Purveyors of Fast Foods - A Good Investment Choice?
If you like A&W, KFC, Long John Silver's, Pizza Hut, and Taco Bell, then invest in their parent. I’m reading a book by Yum Brands CEO, David Novak entitled, “Taking People with You, The Only Way to Make Big Things Happen. “
Mr. Novak made big things happen at this spin off of Pepsi Cola and I decided to do some research into adding the company to my personal investment portfolio. What follows is a summary of my findings, my conclusion that YUM is indeed a very good investment right now, and my reasons why.
This can be viewed as a glimpse into me following some threads and trying to discover whether or not YUM is a good investment right now, so here goes . . . .
History of the Company and Management
When considering adding a security to their portfolio, most value investors first look at the history of the company and its management team. Have then demonstrated success in the past that would lead us to believe they will continue to outpace their industry and provide a good return on my investment?
The corporate website declares that Yum! Brands, Inc. (YUM) NYSE is “Building the Defining Global Company that Feeds the World,” based in Louisville, KY is “one of the world’s largest restaurant companies with 41,000 restaurants . . . and ranked #216 on the Fortune 500 list with 2014 revenues of $13 Billion.
They emerged as a stand-alone company in 1997 when Mr. Novak was asked to take over responsibility for what had been the packaged foods brands division of PepsiCo , Inc. (PEP). FYI, PepsiCo is #43 on the Fortune 500 list with revenues of $66.4 Billion.
Novak was so well thought of as a leader while at PepsiCo that then chairman Roger Enrico asked David to create a leadership training program for all company executives. Before he could get started, however, TRICON (the original name for the company and nowhere near as appealing as YUM!), was launched and he had to defer the leadership program for a while to build the new company.
Revenues rose steadily from around $400 million when the division was spun off to the current $13 Billion. Quarterly reports show consistent 20-25 % increases across the board for the first several years. They clearly had it going on!
As often happens, it is harder and harder to sustain explosive growth as the numbers increase, but they stayed the course and up until the last year or so were able to keep revenues, profits and share prices moving steadily upwards.
So I give them high marks for historical revenue performance and management expertise.
Historical Performance of Share Price
With the exception of the dip in 2008, share price has also risen steadily no matter how you look at, 1 year, 5 year, HTD – all the way, great performing stock. Their five year stock chart alone looks like the hockey stick chart overly optimistic small business owners present to their banks – unbelievable!
Concerns over Most Recent Performance and Objective Analysis
I came into this thinking I was a buyer but most recent year’s results caused me to slow down. Yes, great history but what about current results and prediction for the future? Is it still a good company to invest in or should I hold for a bit?
Over the past year, YUM stock performance has not kept pace with the S&P 500, profits dipped. Whoa back there, Kemo Sabe! Let’s see what they are doing about the recent reversal. Here is what Mr. Novak says in 2014 first quarter highlights, “Yum! Brands is clearly on its way to a strong bounce-back year delivering first-quarter EPS growth of 24%.
Sounds Impressive, Where’s the Proof?
Can they maintain the explosive growth and will the stock price continue to rise? For a value investor and me, that is the 24,000 dollar question. Past performance is nice, but that’s not why I came to the party. I want to know what will happen in the future.
Grass Roots Analysis
This is my favorite part of analyzing a company and something Warren Buffet does it all the time. He is a reportedly a regular at McDonald’s and likes to do his own grass roots research for all the companies in his massive portfolio. The press is beating McDonald’s up pretty badly right now saying their turnaround efforts are not working.
Novak engineered the Taco Bell turnaround with innovative product introductions in 2012 and I expect he can do the same for the company as a whole. They recognized that tacos were a bit messy as drive through fare so added burritos, gorditas, crunch wraps and all kinds of stuff that I really like that are self-contained and easy to eat while driving.
I am letting my stomach be my guide for this section and I am an admitted fast food junky and Taco Bell is my favorite all time fast food restaurant.
Crystal Ball Time
So I pull out my magic crystal ball, throw a few darts and here is my conclusion for YUM:
- Fast food business continues to dominate the restaurant industry. More and more moms would much rather grab something to go than cook. Busy families rarely sit down to a meal at home anymore so that all bodes well for the industry in general.
- David Novak is a proven leader and he also knows how to weather a storm. He will rise above the current slip and bring performance back in line. This is not his first rodeo by any stretch of the imagination.
- New marketing campaigns at all the restaurants are targeting new audiences and based on my grass roots analysis it is working. I used to breeze through the take out window line at my local restaurant but now am at least 4-5 cars back every time I visit any time of the day.
- After many years as a “no show” for me, Pizza Hut is back on my radar screen and the last two or three experiences have proven very rewarding. Food was good, hot and delivered as promised both for online ordering and at the in house buffet.
It’s a roll of the dive to be sure, but I am in for a strike price of $75. It may or may not execute, but that’s OK. I only want it if I can get a bargain price.