Whale Watching: Bill Ackman thinks that YUM is YUCK
August 17, 2010
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In my next whale watching post, I want to take a look at Bill Ackman's Pershing Square Capital. One interesting move that he made during the quarter is bidding adieu to a huge chunk of his stake in Yum! Brands (YUM), selling 13.3 million shares of his 15.2 million share position during Q2.
Pershing Square: Held 1.9 Million Yum Brands Shares At June 30 Vs 15.2 Million
I realize that a huge number of hedge funds and mutual funds own stakes in Yum as a play on the company's rapid growth in emerging markets, like China, but I personally have never gotten this investment.
First of all, the company's three restaurant franchises, KFC, Taco Bell, and Pizza Hut suck. I used to eat Taco Bell and Pizza Hut back when I was in college many moons ago, but I wouldn't touch them with a ten foot pole today and I'm hardly what one would call snobby. I'll gladly eat Mexican food at Chipotle (CMG), Baja Fresh, or Qudoba (JACK)...but Taco Bell is the bottom of the barrel. It's food is cheap, but it's low quality and terrible for you.
The food is even worse at Pizza Hut. Good pizza places are a dime a dozen. Why would anyone order pizza from Pizza Hut? I realize that things are a little different in certain parts of the Midwest, but here in the East there's an awesome Mom and Pop pizza joint on every corner. Heck even the lowly Papa Johns (PZZA) and Dominos (DPZ) have better pizza than the Hut. I think that they put a full gallon of oil in each one of their pan pizzas.
This brings us to what I consider to be the crown jewel of the restaurant empire formerly known as Tricon, KFC. Unlike most people that I know, I actually kind of like the food at Kentucky Fried. I suppose that it stems from my fond memories of taking a basket of KFC on picnics with my family when I was young. KFC's food is tasty, but it again is pretty bad for you. I must be getting old because I'm at the age where I care about such things, that and the fact that I've already had a bypass make me, well bypass going to KFC on a regular basis.
While I was reading BusinessWeek magazine this week, I came across a story about just how messed up things are at KFC in the United States right now. It's not pretty:
Why KFC Franchisees Are Squawking
KFC Sued for Ads Touting Grilled Chicken Over Crispy
KFC Fails to End Suit Over Chicken-and-Sides Coupons Pitched on Oprah Show
Yum!'s international operations seem to be run well, but domestically this does not sound like a well-run company at all. Yum has been smart to emphasize international growth, because its same store sales are falling quarter, after, quarter, after quarter here. I must say though, no wonder everyone seems to hate Americans if this is the sort of food that we're selling to them ;). I kid, I kid...somewhat.
Yes YUM pays a dividend, though at a little over 2% it's nothing to write home about. Yes YUM has great exposure to emerging markets, sales there represent nearly half of the company's operating profits today. YUM's return on invested capital leads the industry. Still, I just am not quite sure that I get it. 18.5 times trailing earnings for a company that aims to grow EPS at 10% per year just seems a little expensive to me. Perhaps that's what Ackman was thinking as well. Or perhaps he just found another idea that he like better and decided to reallocate his funds.
Is there anyone out there who lives abroad or who has been to a number of different countries can provide some feedback on what foreigners think about Taco Bell, Pizza Hut, and KFC. I'd love to hear what people in China or Brazil think about Yum!'s stable of brands. How long do you think it will be before foreigners realize that these restaurants' food is terrible?
Deej
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