Saturday, May 24, 2014

Yum! Brands Is Cheap and Delicious

This article was originally published by TheStreet on May 16, 2014

By Sarfaraz A. Khan. Research Asst Raza B. 

NEW YORK (TheStreet) -- KFC and Taco Bell have gone global. And finally Yum! Brands (YUM) has some good news from China.

The company's sales in China, its biggest market, have started to grow at double-digit rates following flat growth in the last fiscal year. Moreover, menu changes, ad campaigns and 700 new restaurants will fuel Yum!'s growth in China in the coming years. But the company still has to find a way to post same-store sales growth in India, another key emerging market which underpins Yum!'s future.

Meanwhile in the U.S., the company is ramping up competition with its old rival McDonald's (MCD) by launching a new  breakfast advertising campaign.
The stock looks so good that the Action Alerts PLUS portfolio managers,TheStreet's Jim Cramer and Stephanie Link, bought more Yum! today. Link and Cramer see momentum for a "double-digit bottom line and high-single-digit top line" for Yum! (For more of Link and Cramer's investment wisdom, check out Action Alerts PLUS.)
Yum! shares are down 1.06% year to date. The stock closed down 6 cents on Friday at $74.76, but should go higher due to further improvements in China and better results from Taco Bell.
At the current price, investors can buy the shares cheaper than an insider did around 10 days ago. As per a Securities and Exchange Commission filing, one of Yum!'s directors purchased 10,000 shares at an average price of $76.12 per share. That's an endorsement, too.
Last month, Yum! announced its first quarterly results in which its global revenues increased by 7% year-over-year to $2.27 billion, while its net income climbed 18% to $399 million. This was due to an increase in the number of outlets and a rebound in China.
The company opened 249 new restaurants in international markets, 86% of which were located in emerging markets such as China, Vietnam, India, Pakistan and Indonesia. In China alone, Yum! established 123 new outlets.
Yum! Brands, unlike McDonald's, is focused on emerging markets whose economies are expected to grow three times faster than the developed markets for the foreseeable future.
When it comes to emerging markets, it doesn't get any bigger than China. According to the BBC, Yum! is the biggest foreign brand in the country. Currently, the company has more than 4,600 KFC and 1,300 Pizza Hut outlets operating in more than 950 cities. There are more than twice as many KFCs in the country as McDonald's.
In the previous quarter, the company's revenues from China increased by 20% year-over-year to $1.38 billion, thanks to the robust growth in same-store sales: 11% at KFC and 8% at Pizza Hut. The increase in sales was driven by the Chinese Lunar New Year, which is a peak period for sales.

Moreover, the double-digit year-over-year growth is also partly due to Yum!'s poor performance in the first quarter of 2013, when the company's same-store sales plummeted by 20%. This drop was attributed to the bird flu outbreak and a food-safety scandal in China that severely hurt the demand for chicken.
The strong year-over-year growth suggests that Yum! is on track for a full recovery. The company still has a ways to go. Prior to the avian flu and poultry supply issues, in the third quarter of 2012, Yum! Brands reported revenues of $1.98 billion, 43% higher than the most recent results.
The increase in sales was partly due to the new ad campaign for KFC's crispy chicken and a new menu which includes 15 additional items. Plus, the company is planning to open 700 new outlets in China in the current year, which will drive its future growth.
In India, Yum! reported a 15% year-over-year increase in sales in the first quarter. As in China, Yum! is eyeing future growth in India through new store openings, better advertising and new product launches. The company, however, still has to work on improving its same-store sales, which fell 1% in the first quarter of 2014, following a 1% drop in FY 2013.
Unlike with its China and India divisions, there is no U.S. division. That is because Yum! has changed its reporting style by combining Yum! Restaurants International, which included 14 different developed and emerging markets, and the U.S. divisions into three brands: KFC, Pizza Hut and Taco Bell. Consequently, this time Yum! has not reported the specific revenue and profit numbers for its U.S. operations.
However, in the first quarter of 2014, the company said that it struggled at home due to the severe weather conditions.
A key difference between the U.S. and other markets is that the U.S. is heavily weighted toward Taco Bell, which represents two-thirds of the country's operating profits. Currently, Taco Bell is responsible for a fifth of Yum!'s operating profits, 97% of which come from the U.S.
In the U.S., Yum! has launched the third round of its breakfast advertising campaign, mainly aimed at younger customers. The company is a new player in this industry, which is dominated by its rivals McDonald's and Starbucks (SBUX).
Yum! is focusing on expanding its breakfast menu in new cities, which could drive Taco Bell's revenue growth in the coming quarters. McDonald's, on the other hand, has downplayed any threat to its position in the breakfast industry from Taco Bell's entry in the market.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.