Since cheap tacos, affordable chicken meals and pizza are foods that people who are struggling economically tend to get delivered, Yum Brands (NYSE:YUM) should do relatively well in the coming quarters. Consequently, Yum Brands stock should also perform fairly well over the medium and longterm.
Yum franchises Kentucky Fried Chicken, Taco Bell and Pizza Hut restaurants. The company’s restaurants are performing fairly well in this environment dominated by delivery and takeout of fast food. I expect this trend to continue as Americans grow used to getting their restaurant food using those methods and enjoy doing so.
In the U.S., KFC’s same-store sales actually increased 7% in the second quarter, while Taco Bell’s global sales fell only 7% year-over-year.
The company reported that, in June, the same-store sales of its open restaurants fell only “a few [percentage] points.” Also boding well for Yum, the company’s overall digital sales jumped over $1 billion year-over-year in Q2 to $3.5 billion. And Yum’s overall earnings per share, excluding certain items, came in at 82 cents, down just 12% YOY. Its same-store sales worldwide fell 15% YOY in all of Q2. It reported Q2 earnings per share of 82 cents.
Compare Yum’s results to Starbucks (NASDAQ:SBUX), which I have contended is not well-suited to the current environment. That company’s comparable sales tumbled 41% YOY last quarter, and at the end of the quarter, its sales were still sinking 16% YOY.
Yum also outperformed McDonald’s (NYSE:MCD), whose total comp sales tumbled 24% last quarter, although McDonald’s U.S. comps fell just 2.3% YOY in June.
KFC and Taco Bell Turn Themselves Around
KFC turned around its brand last decade. The chain effectively used different actors to play its founder, Colonel Sanders, in ads. It also launched “a series of innovative food items often derived from local and regional flavors, such as the popular Nashville Hot Chicken, which debuted in 2016, as well as Pickle Fried Chicken and Chicken & Waffles” in 2018.
Also debuting popular new menu items, such as the Dorito Loco, last decade was Taco Bell. Further, the brand chose a new marketing slogan, “Live Mas,” which was quite effective.
Not surprisingly, given the strength of the two huge brands, Yum Brands’ results strengthened in recent years. Its EBITDA rose from $1.77 billion in 2015 to $2.06 billion last year. Yum’s top line actually dropped to $5.6 billion in 2019 from $5.88 billion in 2017, but that appears primarily due to its decision to franchise most of its restaurants.
Yum Brands stock, meanwhile, jumped from $48 at the beginning of January 2016 to $119 at the beginning of September 2019. In February, before the novel coronavirus crisis arrived, shares were trading at $103.
Yum’s Success Is Likely to Continue
As I suggested at the beginning of the column, I believe that Taco Bell, KFC, and Pizza Hut are very well-suited to the current environment. Yum’s affordable and well-loved tacos and chicken should thrive in the recession in which food delivery and takeout are extremely popular.
The fact that the company generated a significant profit last quarter, while its same-store sales only fell a few percentage points in June, strongly indicates that my thesis is correct.
Meanwhile, I believe that the current environment gives Yum Brands an opportunity to turn its Pizza Hut brand around.
Pizza Hut has long been known as primarily a fairly boring, dine-in pizza chain. Yum should launch menu innovations at Pizza Hut, such as a new, extra-spicy sauce, a new type of cheese, and/or new toppings, and emphasize in ads that Pizza Hut’s pizza is available for delivery. Those changes could enable Pizza Hut to compete effectively with Domino’s (NYSE:DPZ) and Papa John’s (NASDAQ:PZZA) in the large and growing U.S. pizza delivery market.
This will lift Yum Brands stock in the process.
The Bottom Line on Yum Brands Stock
The shares are trading at an affordable forward price-earnings ratio of 30.6, based on analysts’ average 2021 EPS estimate.
Given the strength of Yum’s brands and their suitability to the current environment, I think the company’s results for the rest of 2020 and for 2021 can beat analysts’ average estimates. As a result, I recommend that investors looking for a stable, low-risk name buy Yum Brands stock.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, Larry Ramer did not own any of the aforementioned stocks.