Unlocking Yum! Brands: A Fair Value Analysis
Yum! Brands, Inc. (NYSE:YUM) stands as a giant in the fast-food industry, showcasing brands like Taco Bell and Pizza Hut. But is its stock fairly valued? Let’s delve into an engaging analysis of Yum! Brands to see what the projections reveal.
The Fair Value Projection
The estimated fair value for Yum! Brands is US$152, derived from a detailed 2-Stage Free Cash Flow to Equity model. Currently, the share price hovers around US$143, suggesting that Yum! Brands is trading close to its fair value.
Additionally, the consensus among analysts points to a target price of US$160, which is approximately 5.3% higher than our fair value estimate.
Understanding the DCF Model
To uncover Yum! Brands’ investment potential, we utilize the Discounted Cash Flow (DCF) model. This valuation method may seem daunting, but it can be simplified for the average reader. The DCF evaluates future cash flows, discounts them back to their present value, and thus estimates the intrinsic worth of a company.
Two-Stage Growth Model Explained
Our analysis employs a 2-stage growth model, which consists of an initial high-growth phase followed by a more stable, lower-growth phase. For the first ten years, we rely on analyst projections or past cash flow data to guide our estimates. Companies typically experience a deceleration in growth rates over time, reflecting the inherent nature of market dynamics.
Present Value Calculation
The concept of time is crucial in finance; hence, we need to discount future cash flows to present value. Below is a snapshot of expected levered cash flows:
| Year | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 |
| Levered FCF ($, Millions) | US$1.46b | US$1.76b | US$2.06b | US$2.29b | US$2.49b | US$2.66b | US$2.81b | US$2.94b | US$3.07b | US$3.19b |
Present Value of 10-year Cash Flow (PVCF) = US$15b
Taking Stock of Terminal Value
After the initial growth stage, we turn our attention to the Terminal Value (TV), which encapsulates the value of Yum! Brands’ cash flows beyond the first phase. Using the Gordon Growth formula, we calculate:
Terminal Value (TV) = FCF2034 × (1 + g) ÷ (r – g) = US$3.2b × (1 + 2.9%) ÷ (8.4% – 2.9%) = US$60b
When discounted back to present value, we find:
Present Value of Terminal Value (PVTV) = TV / (1 + r)10 = US$60b ÷ (1 + 8.4%)10 = US$27b
Putting It All Together
The total valuation merges cash flows over the next ten years and the discounted terminal value, leading to a Total Equity Value of US$42b. When divided by shares outstanding, this aligns closely with the current market price of US$143, indicating Yum! Brands is priced fairly with only a 5.4% discount.
Assessing Key Risks and Growth Prospects
Understanding Yum! Brands’ financial forecast extends beyond the DCF model. Factors like growth rates, competition, and potential risks must be assessed. Here are three critical areas for further exploration:
- Risks: Review the 3 warning signs identified in the company’s profile that could impact your investment decision.
- Future Earnings: Analyze Yum!’s growth trajectory against its peers by checking out our free analyst growth expectation chart.
- Alternative Investments: Investigate solid business fundamentals in other companies that may present better investment opportunities.
In conclusion, while the DCF model provides a structured approach to understanding Yum! Brands’ value, it’s essential to synthesize various analytical lenses to form a holistic view of your investment.
For continuous updates on Yum! Brands and the broader stock market, consider the Simply Wall St app, which delivers daily DCF evaluations!
Feedback and Inquiries: Should you have any concerns or feedback regarding this article, feel free to reach out to us directly or email editorial-team (at) simplywallst.com.
This analysis is intended for informational purposes only and does not constitute financial advice.
