Yum! Brands (NYSE:YUM), the parent of Taco Bell, Pizza Hut and Kentucky Fried Chicken, beat earnings estimates for its second quarter, demonstrating the performance a value investor should expect.
YUM stock fell nearly 2%, and shares of Yum will open for trade Thursday at around $77.50. TThe company reported earnings of $321 million, 97 cents per share, on revenue of $1.368 billion, against net income of $206 million, 58 cents per share, on revenue of $1.448 billion a year ago. Investors had been expecting earnings of 79 cents.
The numbers illustrated the result of Yum “refranchising” restaurants, the same strategy McDonald’s (NYSE:MCD) employs, which reduces turnover but increases profit for the franchisor. Yum’s dividend is now 36 cents per share, against 30 cents per share a year ago.
Should You Buy YUM Stock?
All this represents good value for shareholders: a price-earnings ratio of about 18, a yield of 1.82% with growing earnings and expectations for more dividends ahead.
But while YUM stock is up 23% over the last year, that trails the gain in the S&P 500 over that time, which is 28%. People just aren’t rushing to buy. Analysts are evenly split with some saying to buy YUM stock, while others remain on the fence in the “hold” camp.
Don’t blame management for the stagnant stock price. The company’s decision to split the parent company from its Chinese operations has benefited the company, with Yum beating estimates but Yum China (NYSE:YUMC) falling short. The Chinese stock had been buoyed over a rumored buyout from Hillhouse Capital Group, a major Chinese tech investor.
That story, too, illustrates the growing market debate between growth and value. Tech stocks offer growth, but you pay a premium price for it. Value stocks like Yum deliver profit, and appear cheap, but don’t offer the same action.
The answer for wise investors, of course, is to own both growth and value, along with some debt — maybe a little real estate — to be diversified among asset classes. But traders care only for what’s happening now, not for what’s in your retirement portfolio.
Comparing YUM to Value Stocks
A better way to play might be to compare Yum with other value plays, like McDonald’s, which is in the same industry. McDonald’s gain over the last two years has exceeded that of Yum, at 31%, and even over five years, which includes the period before Steve Easterbrook came in as its CEO.
That could change over the next year, as Yum is not as far along in transitioning to franchising as McDonald’s is. Or it may not, as Yum faces new competition from chains like Chipotle Mexican Grill (NYSE:CMG), which hired away former Taco Bell CEO Brian Niccol early this year.
The new star in the Yum universe is Roger Eaton, who is the company’s chief operating officer and runs Kentucky Fried Chicken. His division saw the best growth in the company, up 6%, with same-store sales up 2% and the number of units up 5%.
The Bottom Line
Value stocks don’t fall like growth stocks, but they don’t rise like growth stocks either. Well-run value stocks are an essential part of any balanced portfolio, and Yum is a well-run company.
That means your money is relatively safe, unless people stop eating pizza, fried chicken and tacos, but you’re not going to get rich from it. Yum’s dividend is weak, but the price-earnings ratio is low in the current market, and if your broker tosses some shares in your shopping basket you shouldn’t slap her hand away.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.