Friday, 24 April 2015

Yum! Brands: great theme but take a few tactical profits

Yum! Brands has kicked on well since my last write-up (link here) and is now trading at an all-time high:

The reason why the share pushed up was not immediately obvious when looking at the data as earnings and EPS both fell: 

However it is all about the future.  With China - as detailed at the previous link - being the key driver to results a reiteration in a continued improvement in this market helped boost sentiment.  

As the company put it on the conference call: there is ‘a lot to be excited about in KFC China’ and the operating leverage resulting from this essentially gave the company confidence that they will achieve their target of 10% EPS growth this year.

This was augmented by continued good KFC trading internationally...

...and positive momentum outside the US in the Pizza Hut division.  On this division management guided that they had a ‘firm view on what needs to improve’

Whilst there was an acknowledgement that the company was in Q2 lapping the strongest period for both general Chinese country trading as well as for the Taco Bell division.  Additionally there is some higher tax burden to bear. However this was partially offset by lower prices in both cheese and chicken.

As discussed previously Yum! Brands remains at the centre of a highly attractive theme of the growth (especially in China) of various fast food/casual dining outlets.  The question is what is a sensible price to pay for such exposures at the moment?

Even though debt is less than x1 ebitda the current EV/ebit of around x16 for FY16e is full.  A x14 multiple would be attractive (c. US$73s) to buy but here around the US$84 level I would have a more neutral view.  For longer-term holders no need to panic given this is a growth theme over time but for shorter-term and more tactical investors I would be more neutral/take some profits.  

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