Yum! Brands Inc. $34 - New York symbol YUM

YUM! BRANDS INC. $34 (New York symbol YUM; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 520.0 million; Market cap: $17.7 billion; WSSF Rating: Average) operates over 34,000 restaurants in 100 countries. Banners include KFC (chicken), Pizza Hut, Taco Bell (Mexican food), Long John Silver’s (seafood) and A&W (hamburgers). Most of Yum’s recent growth has come from its overseas operations, particularly in China where it owns 2,300 KFC and 370 Pizza Hut outlets. This division now accounts for 20% of Yum’s revenue. Other overseas operations provide 30% of its revenue, while the United States accounts for 50%. Thanks to a 7% rise in same-store sales at its China division, plus a 5% gain at its other international operations, Yum’s sales in the second quarter of 2007 grew 9.1%, to $2.4 billion from $2.2 billion. Same-stores sales in the U.S. were flat due to a food safety scare at some Taco Bell restaurants in the northeast. Income in the quarter rose 14.7%, to $0.39 a share from $0.34 a year earlier (all per-share amounts adjusted for a recent 2-for-1 stock split). It will probably take a few more months before sales growth resumes at Taco Bell. Meanwhile, Yum’s plan to open about 1,000 new restaurants in China and other countries this year should help offset slow domestic sales. Like McDonald’s, Yum is converting its U.S. restaurants into franchises. Right now, franchisees own 78% of Yum’s U.S. outlets. That should rise to 83% by the end of 2008. The plan will give Yum more cash for share buybacks and dividends (the current rate of $0.60 yields 1.8%). Cheese accounts for about 12% of Yum’s raw material costs, and rising cheese prices could hurt its profit growth. But earnings should reach $1.64 a share in 2007, and the stock trades at 20.7 times that estimate. Yum Brands is a buy.