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Remain Cautious in Yum Stock at Current Levels

Like many stocks on Wall Street, Yum! Brands (NYSE:YUM) stock saw significant volatility so far this year. YUM stock traded at $100 at the beginning of the year and plunged by 45% to just under $55 as the novel coronavirus driven panic peaked.

Remain Cautious in Yum Stock at Current Levels
Source: JHVEPhoto / Shutterstock.com

However, as stocks rallied from oversold levels, Yum has moved higher by 53% and trades just above $81.

The rally in YUM stock has been triggered by few factors. First, the panic-driven selling resulted in attractive valuations. Second, expansionary monetary policy support has provided liquidity support, which boosted market sentiments. Third, Yum Brands has strong growth visibility beyond the coronavirus driven crisis.

However, even with these factors, I remain cautiously optimistic on the stock. I do believe that the stock is worth accumulating on renewed correction, but current levels look risky.

China’s Growth Will Disappoint

YUM stock also surged higher in the recent past because 95% of the company’s restaurants have reopened in China.

This is an important development as 27% of KFC’s sales came from China in the last financial year. China also accounted for 17% of YUM’s Pizza Hut sales. These numbers provide an insight on the importance of Chinese markets for Yum Brands.

However,  same-store-sales data is likely to disappoint in China for the coming quarters. The downturn can be potentially prolonged. According to a report from South China Morning Post, bars and restaurants are still empty in Beijing.

While the coronavirus is largely contained in China, consumers and authorities still fear a new wave of infection. The implication for Yum Brands is that increases in consumer activity will be very gradual. This will impact existing store sales and will also impact the company’s growth plans for 2020 and 2021.

The same holds true for the U.S., which is still near the peak of the pandemic. Of course, free delivery is being offered at many restaurants, including McDonald’s (NYSE:MCD) and Chipotle Mexican Grill (NYSE:CMG). To some extent, this will offset the weakness in the dine-in segment. However, this is unlikely to be enough to boost same-store sales.

Therefore, my bearish view for the coming quarters is largely on expectations that cautious consumers will prolong the weakness in the industry.

Robust Long-Term Growth Outlook

It’s likely that the novel coronavirus pandemic will leave a scar that takes longer to heal. However, it would be too pessimistic to believe that the world is unlikely to overcome the crisis. Once the virus is contained, focus will shift to renewed growth.

Specific to Yum Brands, I believe that there is a huge impending growth opportunity. This is evident from the fact that the company’s pace of new restaurant addition has accelerated on an annual basis since 2015.

Another indication of the impending growth comes from the following fact: In the U.S., there are about 20 Pizza hut restaurants per million consumers. In China, that ratio falls to just two restaurants per million people.

Countries like China, India, Indonesia and Brazil can drive long-term growth. This factor makes YUM stock worth considering on any renewed correction.

High Debt Is Not a Concern

As of 2019, Yum Brands reported total debt of $10.6 billion. I don’t see high debt as a concern in these challenging times.

First, the company’s business model is not capital intensive. For the last financial year, capital expenditures were just $196 million. This leaves the company with ample cash flows for dividends, share repurchase and deleveraging.

Second, the company’s average debt maturity terms of seven years and there is no major debt refinancing due in the next few years.

Third, Yum Brands reported cash and equivalents of $605 million as of December 2019. In addition, the company had $1 billion in available credit. Most recently, the company closed the offering of $600 million in senior notes due 2025. The consolidated liquidity buffer will help Yum Brands navigate the challenging period.

The Bottom Line on YUM Stock

There is little doubt that Yum Brands is likely to report weak numbers when first quarter 2020 earnings are reported later this month. Further, the weakness in sales can potentially persist through the year. This will translate into renewed correction for YUM stock.

However, there is visibility for long-term growth in emerging markets and that should keep investors interested in the stock. Any deep correction from these levels would be an opportunity to accumulate YUM stock.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/04/remain-cautious-in-yum-stock-at-current-levels/.

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