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YUM! BRANDS INC. (New York symbol YUM; www.yum.com) has 40,324 fast-food restaurants in over 110 countries. Its main banners include KFC (fried chicken), Pizza Hut and Taco Bell (Mexican food). Franchisees operate 80% of these outlets.
The company was the first fast-food chain to enter China, in 1987, and is now a leader in that country. Its 6,387 Chinese outlets now supply 53% of its sales and 35% of its earnings. Other markets include the U.S. (23% of sales, 31% of earnings), and other countries (24%, 34%).
Sales rose 25.8%, from $10.8 billion in 2009 to $13.6 billion in 2012. However, sales fell 4.0%, to $13.1 billion, in 2013 on allegations that Yum’s Chinese KFC outlets (which account for 73% of its restaurants in China) bought chicken with higher-than-permitted levels of antibiotics from two suppliers. Chinese regulators investigated and did not charge Yum with violating food-safety standards, but the company still strengthened its food-safety policies.
Earnings jumped 46.8%, from $1.05 billion in 2009 to $1.5 billion in 2012. Per-share earnings rose at a faster pace of 49.8%, from $2.17 to $3.25, on fewer shares outstanding. However, the problems in China cut 2013 earnings to $1.4 billion, or $2.97 a share.
Yum is working on increasing sales at its Chinese KFC outlets with new products and better packaging and marketing. These moves seem to be working. In the second quarter of 2014, its Chinese sales rose 21% from a year earlier, while same-store sales gained 15%.
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The company gets just 1% of its sales from its 714 KFC and Pizza Hut outlets in India, but it feels this division could grow as quickly as its Chinese operations. The India division’s same-store sales fell 2% in the latest quarter.
Meanwhile, Yum continues to expand internationally. It opened over 1,250 overseas outlets in 2013 and plans to add 1,850 more in 2014, including 700 in China, 150 in India and 1,000 in other nations.
The company is also working on new ways to boost its U.S. sales. For example, its Taco Bell outlets recently started selling breakfast meals. In addition, Pizza Hut has signed a deal with online TV streaming service Hulu that lets customers easily order pizza while watching their favourite shows.
Yum’s sound balance sheet will support its growth. As of June 14, 2014, its long-term debt was $3.1 billion, or a low 9% of its market cap. It also held cash of $597 million, or $1.36 a share.
The stock fell recently on news that another supplier of Yum’s in China mixed expired meat with fresh meat. The company quickly stopped using this supplier. No ill effects were reported, and Yum does not expect this latest incident will significantly disrupt its operations in China.
Yum still expects that its 2014 earnings will rise 20%, to $3.68 a share. The stock trades at 20.4 times that forecast. That’s a reasonable multiple in light of fast food’s growing popularity in developing markets. The $1.48 dividend yields 2.0%.
Yum Brands is a buy.
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Beginning today, we launch Our Top U.S. Stocks, a feature which will appear every Thursday as our daily post. We are also launching a new approach—you will get our specific advice on whether to buy, hold or sell the stocks we profile, with a full explanation of how we arrived at our opinion. You will read about stocks making moves you should know about covered in our newsletter on U.S. investing, Wall Street Stock Forecaster.
