Yum Brands Not a Main Course Yet

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.

When it comes to sales growth and quarterly revenue growth, the analysts expect a 4.5% decline to around $3.03 billion for the first quarter of 2013. Remember, YUM has a market cap of more than $29 billion and runs an enormous system of restaurants, which prepare, package and sell various food items, as well as operates Chinese casual dining concept restaurants.

YUM operates approximately 39,000 restaurants in 125 countries and territories under the KFC, Pizza Hut and Taco Bell brands. They can't seem to grow fast enough, even in places such as Russia and Iran.

Keep in mind that YUM was fried after a TV report late last year claiming that some of its suppliers were giving chickens unapproved levels of antibiotics (although it didn't say whether the chickens had consented to receiving the antibiotics).

Ever since, YUM has been striving valiantly to regain the confidence of its customers. It's gone so far as to promise investors that they'll be updated with monthly sales figures for the affected regions. In the meantime, there are almost as many nervous investors as there are nervous chickens.

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 Chart 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 Chart YUM data by YCharts

Now this looks a lot better because we didn't compare YUM to CMG. When we see the trailing 12-month revenue per share history line we learn how important it will be for YUM to not only exceed analysts' expectations but to also guide for higher future sales and revenue. The fate of the share price depends on this, so be listening to the conference call and the comments by YUM's key officers.

Analysts and investors are concerned about the company's future sales in China, which account for about half of total sales worldwide. One report says the company has already warned that same-store sales in China had dropped 13% in March, and that will be reflected in Tuesday's quarterly report.

Ending on a positive note, Taco Bell has capitalized on the popularity of Doritos-brand snack chips by introducing an innovation of its popular Doritos Locos Tacos in a cool ranch flavor. If you like YUM's Pizza Hut side of the business, you'll be happy to know they've introduced pizza "sliders," which anecdotally I've learned are growing in popularity.

Recently, I saw another mouthwatering commercial offering boneless fried chicken at none other than KFC. The media blitz of commercials and the new menu items may take time to pay off for YUM, so investors may have to wait until later in 2013 to cash in on gains in YUM shares. If the price moves closer to $60 and I see more insider buying (or dividend increases), I will consider being a YUM investor.

At the time of publication, the author was not long any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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