Feb
29
YUM : Yo Quiero Taco Bell : Stock Recomendation
February 29, 2008 | 1 Comment
I like YUM Brands (YUM). They have Taco Bell, KFC, and Pizza Hut. They provide the junk food both kids and adults love. And being the underdog (or under-chihuahua), it is not in the spotlight as much as McDonald’s (MCD) — another great company. Take a look at McDonald’s lately. They have the lattes (espresso coffee), they have the nice salads, they have the smiley people, and… they have a higher price. Fortunately (for consumers) that price will not go too much higher. McDonald’s can demand a premium for being the front runner, but they can’t go beyond the luxury fast foods like Chili’s, Applebees, 99’s and the likes. Unfortunately, for McDonald’s, they will not capture absolutely all of the market.
There are certain conditions that give an edge to YUM Brands:
- Inflation: Food will cost more. Food at the supermarket is expensive. It is at a point where those taquitos are cheaper.
- Salaries: Salaries will not go higher. People will earn less and less, adjusted for inflation. Why? People are not educating themselves to compete with the global workforce. That means less money to spend. That means they will have to go to the cheapest Fast Food chain they can find: McDonald’s will be a luxury for some.
- People Don’t Like To Cook: Or maybe they don’t have time to. Maybe they need two incomes and the homemaker has to go and search for a job that prevents him/her to be at home to cook. The number of meals eaten outside home continues to increase. People will eat out more: at fast foods!
But most importantly: It is expanding internationally to Russia and China, and just about every country you can imagine.
I know some people like to say: I do not eat at fast foods. But most people (including myself) do eat at fast foods. Sometimes we don’t want to spend the time at a sit-down restaurant. Sometimes we are with friends who drag us there. Sometimes we are short on cash (I do sometimes). Sometimes we just crave for some junk. We all go to fast foods when ether we deny it or not, when ether we shop at Whole Foods or not.
Now the financials. This company surprises us positively by a sliver every quarter: that is consistency. I like consistency because I can trust the numbers a bit more. I like the 1 year target of $40, while it is at $35 (14% on a year like this one won’t be bad). I like the dividend at 1.7% – not huge, but healthy. While P/E is at the industry average of 18-19, Price to Earnings Growth is something I do not like that much. It is at 1.6 vs. 1.3 for the industry. Anything below 2.0 is good, but it is not as good as it could be. I do not like the 3 Billion dollars they owe.
I just bought 10 option contracts. Who knows, maybe I will execute them. Or I will just get my money and run if my assumptions don’t turn true in six months and put the money in the other guys:
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