Three American mega brands to keep buying and one I'd sell
10th May 2023 09:33
by Rodney Hobson from interactive investor
These household names supply everything you need to keep a kid’s birthday party fed and watered. Overseas investing expert Rodney Hobson gives a view on each one plus a stock to sell.
We seem to have fully recovered our desire for the kind of snacks and fast food that we were forced to cut down on during the pandemic. However, not every chain has enjoyed the return to what is often criticized as unhealthy eating.
Fast food outfit Yum Brands Inc (NYSE:YUM) may have some great brands but its current performance is far from tasty. Although its four chains include well-known names KFC and Pizza Hut, it saw net income slump 25% to $300 million in the three months to 31 March, despite a small rise in revenue.
The main problem was that spending on a spate of heavily promoted offers failed to attract sufficient numbers of new customers. This is particularly worrying at a time of risings costs of ingredients, energy and labour.
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Failure to match analysts’ expectations took the shares off their recent peak at $142, but even so they are still around $137, where the price/earnings (PE) ratio is quite challenging at 32 while the yield is only 1.7%.
Source: interactive investor. Past performance is not a guide to future performance.
Contrast this with the much superior performance at larger rival McDonald's Corp (NYSE:MCD) as comprehensively analysed by Keith Bowman ii view: McDonald’s sales stay robust during cost-of-living crisis . The home of the Big Mac has hardy stinted on promotions and advertising, yet it is managing to pass on price increases.
The better results are admittedly reflected in the share price, currently at a new high just under $300, but the fundamentals are equal or superior to those of Yum, with a PE also at 32 but a yield closer to 2%.
Source: interactive investor. Past performance is not a guide to future performance.
Soft drinks and snacks group PepsiCo Inc (NASDAQ:PEP), like McDonald’s, beat expectations with revenue up 10% to $17.9 billion, although net income disappointed, more than halving to $1.93 billion. However, this was entirely due to a distortion caused by a one-off gain from the sale of fruit drinks in the previous year. Underlying profits were comfortably higher despite stiffer manufacturing and distribution costs.
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Pepsi described demand for its eponymous cola, 7Up lemonade and Walkers crisps as resilient and it raised its guidance for revenue and earnings to 8% and 9% respectively for the full year.
The shares have doubled over the past five years to just under $200 and should continue their steady rise despite a somewhat hefty PE of 40. The yield is 2.4%
Source: interactive investor. Past performance is not a guide to future performance.
It was a similar story from Coca-Cola Co (NYSE:KO), where net income rose 11% to $3.11 billion to beat analysts’ forecasts. Revenue was 4.7% higher at $10.98 billion, again better than expected, with some increase in prices.
The shares have baulked at $65 several times over the past 12 months, but they are holding up well at $64 and could easily challenge the ceiling again soon. The PE at 28 is not too challenging for a company of this quality and the yield of 2.8% is reasonably attractive.
Source: interactive investor. Past performance is not a guide to future performance.
Hobson’s choice: McDonald’s is still a buy despite its high share price, and although investors may wish to wait for a dip before tucking in, that may not happen. Yum looks to be a sell while investors can still get out at a comparatively high price.
I have rated Pepsi as a buy several times and that assessment remains in force. Coca-Cola shares are already up 6% since I suggested putting them in an ISA two months ago, but it is not too late to buy.
Update: I warned investors on several occasions last year to sell exercise bicycles maker Peloton Interactive Inc (NASDAQ:PTON), most recently at $10 in late December. As I feared, the shares have continued their downward trend and currently stand at under $8. Revenue in its third quarter to the end of March fell, as the company had warned it would, by 22% to $748.9 million, and the current quarter will be worse still despite an expansion in sales channels and a rise in subscriptions. If you have stayed in this long, you may as well hang on and hope for the best; otherwise continue to stay well clear.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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