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Here's Why Investors Should Retain Yum! Brands (YUM) Stock

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Yum! Brands, Inc. (YUM - Free Report) continues to benefit from robust off-premise sales, strategic investments in digital technology, solid growth at Taco Bell and menu innovations. In the past year, the company’s shares have gained 33%, compared with the industry’s rally of 39.1%. However, the coronavirus pandemic and high debt remain concerns.

The Zacks Rank #3 (Hold) company has an impressive long-term earnings growth rate of 12%. The Zacks Consensus Estimate for earnings in 2021 and 2022 suggests year-over-year growth of 14.4% and 11.1%, respectively.

Growth Drivers

The company is gaining from robust digitalization. At the end of first-quarter 2021, it had more than 39,000 restaurants offering delivery globally, up 16% year over year. In 2020, digital sales were $17 billion, reflecting an increase of 45% over the prior year. During the quarter, Pizza Hut U.S. reported 23% same-store sales growth in the off-premise channel. In the Pizza Hut International segment, off-premise sales generated same-store sales growth of 10% in first-quarter 2021.

In case of Taco Bell U.S., the company has initiated testing of new customizable tablet-based application. Going forward, this advanced point-of-sale system is likely to enhance member experience through optimization features, accuracy, speed and reliability. KFC U.S. has begun the national rollout of its new e-commerce platform.
 

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The company is benefiting from unit growth. During first-quarter 2021, the company opened 660 restaurants and closed 225, resulting in 435 net new units. During the quarter, KFC delivered 4% unit growth and witnessed robust improvement in China, India, Russia and Thailand. During fourth-quarter 2020, the company opened restaurants in China, Russia, Thailand and Eastern Europe. Master franchise agreements in Brazil (Taco Bell), Spain (Taco Bell), and Russia (Pizza Hut), and the international growth alliance with Telepizza to accelerate the development of Pizza Hut in key European markets and consolidate franchisees in Latin America and the Caribbean are likely to drive growth.

Taco Bell has impressed investors with robust results during first-quarter 2021. The company’s comps rose 9% in the reported quarter compared with the year-ago quarter’s growth of 1%. Its operating margin was up 470 bps year over year to 36.4%. It was primarily driven by higher comps growth and lower general and administrative expenses. Taco Bell recorded 73 gross new restaurants openings during the quarter under review. Recently, the company opened its first-ever Taco Bell in Malaysia. Currently, Taco Bell is present in 31 international markets. During first-quarter 2021, Taco Bell generated same-store sales growth of 10% on a two-year basis.

Concerns

The coronavirus pandemic has negatively affected the company’s operations through 2020. Due to the crisis, the company and its franchisees experienced store closures, reduced store-level operations, including lesser operating hours and dining-room closures. At the end of first-quarter 2021, the company had closed 2% of its restaurants on account of the pandemic. Restaurant traffic has been significantly impacted due to the social-distancing protocols.

A strong balance sheet will help the company tide over the ongoing crisis. At the end of Mar 31, 2021, the company’s long-term debt stood at $10.2 billion, almost flat sequentially. However, the company ended first-quarter 2021 with cash and cash equivalent of $561 million, down from the prior quarter of $730 million.

Key Picks

Some better-ranked stocks in the same space include Ruth's Hospitality Group, Inc. (RUTH - Free Report) , The Cheesecake Factory Incorporated (CAKE - Free Report) and Dine Brands Global, Inc. (DIN - Free Report) . While Ruth's Hospitality Group and Cheesecake Factory sport a Zacks Rank #1 (Strong Buy), Dine Brands Global carries a Zacks rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ruth's Hospitality and Dine Brands 2021 earnings are expected to surge 381.6% and 269.3%, respectively.

Cheesecake Factory has a three-five year earnings per share growth rate of 8.5%.

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