Here's Why YUM! Brands May Look Appetizing To Investors Now

YUM! Brands, Inc. (NYSE:YUM) is currently one of the best-performing stocks in the U.S. restaurant space. With a Zacks Rank #2 (Buy) and decent share price appreciation, the stock is a profitable investment choice at the moment.

Yum! Brands has a three-year transformation plan to drive growth at KFC, Pizza Hut and Taco Bell brands. Notably, the company’s transformation and growth strategy involve employing greater focus on the development of its three iconic global brands, increasing its franchise ownership, and creating a leaner and more efficient cost structure. It is also focusing on restaurant development to drive continued growth.

Shares of YUM! Brands have outperformed its industry over the past two years. The stock has gained 47.4% compared with the industry’s rally of 30.4%.

Moreover, an upward revision in earnings estimates for 2018 reflects analysts’ confidence in the company’s future earnings. Over the past 30 days, the Zacks Consensus Estimate for 2018 earnings has been revised upward by 5.7%. Further, the company delivered positive earnings surprise in three of the trailing four quarters, recording an average beat of 22.1%.

Let’s delve deeper into factors that make YUM! Brands a lucrative pick at the moment.

Refranchising Initiatives Bode Well

YUM! Brands adopted a de-risking strategy by reducing its ownership of restaurants through refranchising. In third-quarter 2018, the company had franchise ownership of nearly 98%. It is committed toward becoming at least 98% franchised and possess less than 1,000 company-owned restaurants by the end of 2018.

We note that refranchising a large portion of the system reduces the company’s capital requirements and facilitates earnings per share growth. Arguably, earnings growth is of utmost importance for determining a stock’s potential as surging profit levels often indicate solid prospects (and stock price gains). In 2018, YUM! Brands’ earnings per share are expected to grow 25%.

Increased Efficiency to Drive Earnings Growth

YUM! Brands’ aims to revamp its financial profile and thereby improve the efficiency of its organization and cost structure globally. Management expects to cut capex to about $100 million by 2019, increase free cash flow conversion to 100%, and also reduce General and Administrative (G&A) expenditure by approximately $300 million (or 1.7% of system sales).

In addition, the company aims to maintain an optimized capital structure, with the leverage of five times EBITDA. Over the next three years, it is committed to return an additional $6.5-$7 billion to its shareholders through share repurchases and dividends.

Resultantly, the company expects EPS of at least $3.75 in 2019. The Zacks Consensus Estimate pegs 2019 EPS of $3.81, reflecting a 3% year-over-year increase.

Valuation & Dividend Yield Look Cogent

Looking at YUM! Brands’ Price to Earnings Ratio (P/E) in the trailing 12 months, investors might be willing to pay more as the company is undervalued compared with peers. Its P/E ratio for the trailing 12 months stands at 24.4 while that for the industry is 25.4.

Meanwhile, YUM! Brands’ current dividend yield stands at 1.6% compared with the industry’s figure of 0%.

Other Stocks to Consider

Other top-ranked restaurant stocks are BJ’s Restaurants (NASDAQ:BJRI) , Darden (NYSE:DRI) and Dunkin’ Brands (NASDAQ:DNKN) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings for BJ’s Restaurants, Darden and Dunkin’ Brands for the current year are projected to increase 64.5%, 16.8% and 16.5%, respectively.

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