YUM! BRANDS INC. $82(New York symbol YUM; Aggressive Growth Portfolio; Consumer sector; Shares outstanding: 411.4 million; Market cap: $33.7 billion; Price-to-sales ratio: 2.8; Dividend yield: 1.8%; TSINetwork Rating: Above Average; 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 6,332 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%).
Food safety fears hurt results
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 first quarter of 2014, its Chinese sales rose 17% from a year earlier, while same-store sales gained 9%.
Yum hopes India is the next China
The company gets just 1% of its sales from its 707 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 1% in the latest quarter, but that’s a big improvement over a 3% decline in the year-earlier quarter.
Meanwhile, Yum continues to expand internationally. It opened over 1,250 overseas outlets in 2013 and plans to add another 1,850 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 foods. 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 March 22, 2014, its long-term debt was $2.9 billion, or a low 9% of its market cap. It also held cash of $734 million, or $1.66 a share.
Overseas potential justifies high p/e
The company’s improving Chinese sales should increase its 2014 earnings to $3.67 a share. The stock trades at 22.3 times that forecast. That’s still reasonable in light of fast food’s growing popularity in developing markets. The $1.48 dividend yields 1.8%.
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