Yum! Brands' Management Is Creating Value

Warren Buffett's partner, Charlie Munger, once said, "I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther."

When corporate boards use bad incentives for management's pay, disaster often ensues. (Think Lehman Brothers.) Incentives based on singular metrics such as revenue growth, EBITDA, ROE, or earning per share are easily manipulated and gamed. Fortunately, there is a better way: EVA momentum.

Creator Bennett Stewart of EVA Dimensions, who also co-created EVA (economic value added), calls EVA momentum "the only percent metric where more is always better than less. It always increases when managers do things that make economic sense."

So what does this mean for investors? A positive EVA momentum reading means a company has created more value by increasing its EVA while a negative EVA momentum reading means EVA has decreased, signaling less value creation. EVA momentum is one of the few, if not the only, performance measures with such a clear dividing line between good and bad performance.

The best companies, then, create value in excess of their cost of capital, as reflected by positive EVA momentum. The higher the EVA momentum, the faster management is creating value.

Let's look at Yum! Brands (NYSE: YUM  ) and three of its peers to see how effectively they create value. Here are the trailing four quarters' worth of EVA momentum figures for each company over the past three years, and rankings by percentile versus the Russell 3000 for the past 12 months' EVA momentum.

Related Companies

2009 Q1 TFQ

2010 Q1 TFQ

2011 Q1 TFQ

Russell 3000 Percentile

Yum! Brands 0.7% 0.9% 1% 50
McDonald's (NYSE: MCD  ) 1.7% 1.5% 1.7% 57
Darden Restaurants (NYSE: DRI  ) (0.4%) 0.2% 0.9% 46
Starbucks (Nasdaq: SBUX  ) (1.1%) 3.9% 2.3% 62

Source: EVA Dimensions LLC. TFQ = Trailing Four Quarters.

With an EVA momentum of 1%, Yum! Brands' economic value added increased year over year, placing it in the 50th percentile of all companies in the Russell 3000. All of the three remaining companies had positive EVA momentum over the past 12 months. Remarkably, McDonald's and Yum! have consistently increased their economic value added over the past three years.

Businesses with high EVA momentum are effectively creating value. It will be interesting to see how useful this extremely new metric proves for companies and investors. If it lives up to its promise, EVA momentum will be an essential tool in investors' arsenals.

Another tool for better investing
Most investors don't keep tabs on their companies' fundamental value. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

Dan Dzombak's musings and articles he finds interesting can be found on his Twitter account: @DanDzombak.

Starbucks is a Motley Fool Stock Advisor choice. McDonald's is a Motley Fool Income Investor selection. The Fool owns shares of Starbucks and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 23, 2011, at 10:02 AM, TonyTimpano wrote:

    YUM has added value...it has also destroyed value. More than 100% of the value added has been in China and other countries outside the U.S.

    As far as their domestic business....lowest sales level, lowest profit level, lowest profit margin....ever! Their brands are no longer relevant, with the exception of Taco Bell, and they have proved, thru KFC and Pizza Hut, management's inability to make progress.

    This management team has exercised options or sold stock in excess of a half a BILLION dollars over the last five years....and all they did was ride an international growth engine while their US business slowly and continuously declined. Bravo!

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