NEW YORK (TheStreet) -- The irony of running on an elliptical trainer while watching a mouthwatering Taco Bell commercial hit me like a hot tortilla in the face.If any "watering" should be happening while working out, it should be perspiration. Instead, while I'm watching this commercial, which is telling me that some executive chef has guided the creation of a scrumptious steak taco (or was it a tostada?) for Taco Bell, I'm salivating. So I say to myself, "Myself, maybe on the way home you should try one of those quality-looking entrées before you write an article about its mother company, Yum Brands ( YUM). Whether I did or didn't isn't the point of this article. While Kentucky Fried Chicken, Taco Bell and Pizza Hut were regular feeding holes for my seemingly insatiable appetite as a youth (leading my dear mother to wonder at times if I had tapeworms), I don't eat much fast food now. Yet it wasn't too long ago that I ate at a Chipotle Mexican Grill Chipotle Mexican Grill ( CMG), where I spent around $10 for my meal. It was good enough, but I couldn't help thinking that if I'd eaten at Taco Bell I might have spent less than $6. It's also interesting to note that CMG is a $365-a-share, publicly traded company that is selling for more than 29 times its forward (one-year) earnings. Yet, YUM, which operates Taco Bell and Kentucky Fried Chicken (KFC), headquartered in Louisville, Ky., and formerly known as Tricon Global Restaurants, Inc. is trading for around $65 a share, which represents a forward P/E of around 17.
CMG's current price-to-earnings-to-growth (PEG ratio, five-year expected) is a warm 1.62, while YUM's PEG ratio is 1.84, making YUM's shares appear more overvalued than Chipotle's. At the end of March, CMG had a profit margin of 18.47%, an operating margin of 17% and year-over-year quarterly revenue growth of 13.4%. What will YUM's earnings report reveal after the market close on Tuesday? The analyst community, which on average rates YUM hold or neutral, is looking for an almost 15% year-over-year quarterly decline in earnings per share to around 57 to 60 cents.
Complicating matters in the current quarter, the company noted earlier this month that publicity surrounding a new strain of bird flu in China is also having a "significant, negative impact" on KFC sales for April. This won't be reflected in Tuesday's earnings report. YUM executives say they plan to move forward with plans to expand in China. CEO David Novak has said the focus of the plan is to establish restaurants in key locations, much like McDonald's ( MCD) has done in the U.S. As of Dec. 9, Novak owns more than 282,000 shares of YUM, but as recently as March, a number of insiders were exercising their stock options and selling shares while the stock was above $70. There's been no significant buying reported by insiders since. The five-year chart below compares YUM and CMG shares. YUM data by YCharts
The market is like a voting machine, and the "voters" vote with their wallets. Even though CMG trades at a rich multiple to earnings and pays no dividend (YUM currently offers a 2.06% dividend yield), CMG has performed spectacularly over the past five years. Looking at YUM's five-year chart alone gives another view. YUM data by YCharts