Is Yum! Brands’ Valuation Multiple Bottoming Out?
Yum! Brands Could See Marginal Growth in 4Q15
Valuation
Valuation multiples tell us whether a company is trading at a low, mid, or a high point compared to its historical trend. We’ll use the forward PE (price-to-earnings) for Yum! Brands (YUM).
A company’s forward PE multiple is measured by calculating its current price over its EPS (earnings per share) estimates for the next four quarters. A forward PE valuation multiple tells us how much an investor is willing to pay for the company’s next four quarters of earnings.
The above chart shows how YUM’s share price has moved in tandem with its forward PE ratio. While a PE ratio is a function of price and earnings, in the short term, PE may move with the movement in share price, but over the long term, PE moves with expectations in earnings growth. A company with a slowdown in growth will see its multiple valuation trending downward and vice versa.
Are we seeing a bottom?
Yum! Brands is trading at a valuation multiple of 19.6x and has traded between 19x and 25x over the past two years. The company’s valuation multiple climbed with investors’ expectations that its China division would revert to normal.
This increase in optimism met disappointment when Yum! reported slower-than-expected growth in its past quarter. As of January 29, 2016, YUM’s valuation multiple is trading at 19.6x, which is close to its two-year low point. This indicates that the expectations for the company’s growth may be bottoming out.
This may also be because of the increased risk perception in China due to the bleak economic situation over the past few months. China’s stock market entered bearish territory in January 2015, and consumer confidence hit its lowest level of 103.7 in December 2015, according to the National Bureau of Statistics in China.
An alternative way to access Yum! Brands is through ETFs such as the Consumer Discretionary Select Sector SPDR ETF (XLY). XLY invests about 4% of its portfolio in Starbucks (SBUX). It also has holdings in other restaurants such as McDonald’s (MCD), Yum! Brands, and Chipotle Mexican Grill (CMG).
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