Tuesday, October 07, 2008

YUM Eats Its Own Cash

Yum announced Q3 results telling the world worldwide system sales are up 10%. China is looking very good with an increase of 21%. But worldwide profits grew 2%. Something is very wrong when revenues grow five times faster than profits. I would say the model is not leveraged correctly. They are trying to tell us that EPS grew 16%.

More importantly Yum generated $1.14 Billion in cash from operating activities. They have returned $1.7 Billion in the past three quarters and plan to take that number to $2 Billion.

Let’s cut to the chase. YUM is eating its own cash faster than it can generate it. This is not a start up. It should be on the other side of this graph and generate more cash than it needs. Right now it is buying its stock at expensive lows. Wrong Wrong and still Wrong.