As the restaurant industry gets bigger day by day, giants like YUM and MCD are facing tough competition from peers such as The Wendy’s Company (NASDAQ:WEN), Burger King Worldwide Inc (NYSE:BKW) and Chipotle Mexican Grill, Inc. (NYSE:CMG). Wendy’s and Burger King have been performing really well lately, but their stocks aren’t that attractive. Same is the case with CMG, which has shown a lot of promise lately, but it seems to be a very risky investment. Plus, it’s one of the most expensive buys in the restaurant industry at this moment – a forward P/E (1yr) of 30.98x is a testimony to this. At a forward P/E (1yr) of 25.07x and a mean recommendation of 2.9 on the sell side, Wendy’s also remains an expensive buy. Same can be said about Burger King, which has a forward P/E (1yr) of 23.37x and a mean recommendation of 2.6 on the sell side; hence, not as attractive as MCD and YUM.
Conclusion
China still accounts for more than 40% of YUM’s revenues; hence, it’s the foremost important market for the fast food chain. Due to the recent poultry issue in China, YUM has suffered a huge setback. The million dollar question is when will the company recover from this adverse publicity in China? In 2005, the company faced a similar sort of issue when its business in China was affected by avian flu and Sudan Red. As a result, same store sales were down by more than 40% while the operating income for the year decreased by 5%. The company still managed to increase its sales by 28% while the profits were up by 47% in 2006.
YUM has already announced that its 1Q13 earnings would be severely affected by the recent poultry issue in China. Moreover, it would also have an effect to some extent on the company’s sales in 2Q13. This means that the company won’t have much cash on hand during the first six months of 2013; hence, this could have an effect on its long term strategy of increasing its dividends. Further, with a fierce competitor such as MCD, things could become worse. Therefore, the next six months look bleak for the company. Therefore, we remain neutral on YUM in the short run. However, when you are as big as YUM, these issues just come and go. Moreover, when you have “immortal” brands like KFC and Pizza Hut in your bag, you just need to be patient before it starts to happen once again for you. In this case as well, time would be the eventual healer. Even an industry discount of 15% (used in our valuation above) makes it a great buy for the long run. Therefore, we recommend it for the long run.
The article The Immortal Brand Is Here for Good originally appeared on Fool.com and is written by Waqar Saif.
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