Will Yum! Brands (YUM) Stock be Helped by its Move to Remove Artificial Ingredients?

NEW YORK (TheStreet) -- Shares of Yum! Brands' (YUM) are trading down 0.37% to $91.21 as the company's largest restaurant chains Taco Bell and Pizza Hut said today they were planning to remove artificial colors and flavors from their foods.

The company is looking to take the healthier food route as it faces pressure from a growing number of restaurants and fast-food chains like McDonald's (MCD) and Chick-fil-A who have committed to removing antibiotics from meat.

"We're part of an exciting time - a food revolution," said Liz Matthews, Taco Bell's chief food innovation officer.

By the end of 2015, Taco Bell plans to remove all artificial flavors and colors in their food and replace them with natural alternatives. For instance, instead of "black pepper flavor" the Mexican-style chain will start usual real black pepper in its seasoned beef, the company said. Other additives like trans fat will be removed, and unsustainable palm oil will be replaced with a sustainable one.

The ingredient simplification will impact more than 95% of Taco Bell's core food items across its menu.

Similarly, Pizza Hut said that it would remove artificial flavors and colors from its pizzas no later than the end of July. Artificial colors like Yellow No. 5 will be swapped with turmeric to color the chain's banana peppers.

"Today's consumer more than ever before wants to understand the ingredients that make up the foods that they enjoy," Pizza Hut's CEO David Gibbs said in a statement. Once the changes are completed, the company will start listing all its ingredients online.

TheStreet Ratings team rates YUM BRANDS INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate YUM BRANDS INC (YUM) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its notable return on equity, solid stock price performance and expanding profit margins. We feel its strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market, YUM BRANDS INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Compared to its closing price of one year ago, YUM's share price has jumped by 25.13%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 7.5%. Since the same quarter one year prior, revenues slightly dropped by 3.7%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • 36.77% is the gross profit margin for YUM BRANDS INC which we consider to be strong. Regardless of YUM's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, YUM's net profit margin of 13.80% compares favorably to the industry average.
  • YUM BRANDS INC's earnings per share declined by 6.9% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, YUM BRANDS INC reported lower earnings of $2.29 versus $2.36 in the prior year. This year, the market expects an improvement in earnings ($3.50 versus $2.29).
  • You can view the full analysis from the report here: YUM Ratings Report

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