Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Yum! Brands Making Money?

Asking is Yum! Brands making money sounds strange because the company claims to operate over 48,000 restaurants in over 145 countries.

However, Yum! Brands (NYSE: YUM) has a heavy exposure to the growing trade war between the United States and China. For instance, Yum operates over 5,000 Kentucky Fried Chicken (KFC) franchises in 1,100 Chinese cities, Business Insider claims.

Dependence on the People’s Republic could be problematic because President Donald J. Trump is demanding American companies ‘Start Looking for an Alternative to China’, The New York Times reports. However, it is unclear if Trump is serious about the trade war or trying to drum up votes for his 2020 reelection campaign with China bashing.

Interestingly, Yum! Brand limits its vulnerability to China with Chinese operations owned by a separate company. However, Yum! Brands has staked its reputation on China.

Is the Trade War for Real?

Notably Trump has quickly backed down on trade actions in the past. For example, on 13 August 2019 Trump delayed the enforcement of threatened tariffs until December 2019, The Morning Call reports. To clarify, Trump delayed the tariffs until after the 2019 holiday shopping season to avoid offending voters.

Currently, Trump is threatening to order the search of packages shipped from China in a Tweet. I do not think Trump’s Tweet is serious because delaying packages could anger many potential voters. Merchants who order parts from China, for instance.

The Trade War affects Yum! Brands because its KFC restaurants are on the front lines. In fact, Kentucky Fried Chicken controlled 11.6% of China’s fast food market in 2016, China Daily estimates.

Can Yum! Brands Survive a Trade War?

Bad relations between China and America could hurt KFC because nearly one fourth of the company’s stores worldwide are in the People’s Republic.

To clarify, Statista estimates there were 22,671 KFC outlets worldwide in 2018. If that estimate is correct, Chinese KFCs make up over 10% of Yum!’s worldwide footprint of over 48,000 restaurants.

Adding to Yum’s exposure are around 2,000 Pizza Huts in China, CNN Business estimates. However, both Pizza Hut and KFC are losing market share in China possibly because patriots see them as “western” or American brands. Consequently, the chains are trying to rebrand themselves as more upscale for an increasingly affluent Chinese middle class.

One problem Yum! Brands faces is all the news coverage of Trump’s tweets. Since Trump’s Tweets are likely to get more offensive between now and November 2020, America’s reputation could take a nasty hit in China.

Is Yum! Brands Making Money?

Yum! Brands is facing some serious problems including seven quarters of shrinking revenue growth, Stockrow reports.

Yum’s revenue growth shrank by 4.24% in the quarter ending on 30 June 2019, and 8.53% in the quarter ending on 31 March 2019. In addition, Yum’s quarterly revenues and gross profit shrank over the past year.

For example, Yum! reported a quarterly revenue of $1.391 billion and a gross profit of $735 million on 30 June 2019. Those numbers shrank to $1.310 billion and $639 million a year later.

Yum! is still making money in the form of a $478 million operating income and a $289 million net income reported on 30 June 2019. Significantly, Yum!’s cash flow is low.

Yum! Brands Lacks the resources to survive a Trade War

The company reported a $129 million free cash flow and a $461 million operating cash flow on 30 June 2019. In contrast Yum! Reported a $381 million operating cash flow and a $149 million free cash flow on 30 June 2018.

Finally, Yum! Brands had just $252 million in cash and equivalents on 30 June 2019. That number was down from $313 million in cash equivalents a year earlier.

These figures show Yum! Brands lacks the financial resources to survive a trade war. Unlike, McDonald’s (NYSE: MCD) which reported a $2.828 billion gross profit on 30 June 2019. Yum! Brands is not making enough money from its franchises to survive any serious loss.

Is Yum! Brands a Value Investment?

I think Mr. Market overpriced Yum! Brands (NYSE: YUM) at $117.041 on 27 August 2019. I believe the price is too high because of Yum’s heavy exposure to China, trade war, and America’s chaotic, fast food market.

In particular, Yum! Brands has a heavy exposure to a steady paradigm shift in the American food market. American grocers like Kroger (NYSE: KR) and Amazon’s Whole Foods Market are slowly moving from selling uncooked foods to retailing prepared and precooked foods.

Many American supermarkets now compete directly with KFC by selling fried chicken for instance. In addition, Kroger Marketplace stores compete with Pizza Huts by operating in-store pizzerias. Plus, Kroger Marketplaces compete with Taco Bell by operating in-store taco stands.

Furthermore, Kroger offers Deli Pizza-to-Go from many of its stores. In addition, Instacart delivery is now available from over 1,600 Kroger markets in America. Thus, Kroger is fast becoming one of Yum! Brands’ most dangerous competitors.

Can GrubHub Save Yum! Brands?

Yum! Brands is trying to blunt the threat grocers like Kroger pose through its alliance with GrubHub (NYSE: GRUB).

To explain, GrubHub is a food delivery app that claims to serve 20.3 million active diners and process 488,900 takeout orders a day. I think Grubhub could boast Yum!’s business by bringing popular comfort food like Kentucky Fried Chicken and Taco Bell to America’s doorsteps.

Working with GrubHub, will require Yum! Brands to change its business model. Depending on delivery could force Pizza Hut and KFC, to open smaller stores, or build new stores that are only kitchens. Yum could also open combined kitchens that cook KFC, Pizza Hut, and Taco Food in the same location for delivery pickup.

Could Robots save Yum! Brands?

On the other hand, servicing delivery could cut Yum!’s expense by eliminating the need to serve diners in store. Instead, a KFC or Pizza Hut could consist only of a counter where delivery drivers, customers, and possibly robots pick up food orders.

Notably, a company called Starship Technologies is testing food delivery robots at Purdue University in Indiana, USA Today reports. The Starship robot is a box on six wheels that rolls around campus. Restaurant workers put the food in the box. The robot takes the food to the diner.

Therefore, Yum Brands! Could have a bright future with lower expenses and a larger market. However, reliance on robots and delivery apps is an untested business model. Yet apps and robots could be Yum! Brand’s future.

Moreover, robot cooks like Miso Robotics’ Flippy could increase Yum!’s food production while lowering costs. Currently, Flippy cooks burgers, but a Flippy for tacos or fried chicken is possible.

In addition, a company called Zume Pizza is using robots to make pizza in Silicon Valley. Business Insider reports that Zume is seeking money from big time investors like soft bank to fund a major expansion. Zume’s management thinks robots can cut production costs and improve quality in the pizza business. If Zume is successful, it could create a business model, Pizza Hut could copy to increase production and profits.

Is Yum! Brands a Good Dividend Stock?

The only aspect of the YUM! stock I find appealing is the quarterly dividend of 42₵ last paid on 16 August 2019.

Moreover, that quarterly dividend grew by 6₵ in 2019, rising from 36₵ paid on 23 November 2018 to 42₵ in February 2019. However, credits Yum with just one year of dividend growth.

Consequently, Yum! Brands had a dividend yield of 1.44, annualized payout of $1.68 and a payout ratio of 48% on 27 August 2019. Thus, Yum is a good dividend stock but I do not think it makes enough money to sustain that dividend.

My advice to investors is to stay away from Yum! Brands, currently the fast-food business is too risky to be a reliable income or value investment. Instead, I advise investors to check out GrubHub, or wait until we see how technology and trade war could disrupt fast food’s future.

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