YUM! BRANDS INC. $35 (New York symbol YUM; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 468.7 million; Market cap: $16.4 billion; WSSF Rating: Average) operates over 35,000 restaurants in over 100 countries. It has five main banners: KFC (fried chicken), Pizza Hut, Taco Bell (Mexican food), A&W (hamburgers) and Long John Silver (seafood).
China offsets slowing U.S. sales
Like McDonald’s, most of Yum’s recent growth comes from its overseas operations. Its fastest-growing division is China, which now accounts for 25% of its revenue and earnings. Yum’s U.S. operations supply 45% of its revenue and earnings, while its international division (excluding China) supplies the remaining 30%. The company’s revenue grew from $8.4 billion in 2003 to $10.4 billion in 2007. Earnings grew 44.7%, from $628.0 million in 2003 to $909.0 million in 2007. Earnings per share rose 63.1%, from $1.03 in 2003 to $1.68 in 2007, on fewer shares outstanding. In the three months ended June 14, 2008, Yum earned $0.45 a share before special items, up 15.4% from $0.39 a year earlier. Sales rose 12.5%, to $2.7 billion from $2.4 billion. Same-store sales rose 14% in China, 4% at Yum’s other international operations, and 2% in the U.S. Yum is also selling more of its company-owned restaurants to franchisees. Overall, it owns 22% of its outlets. In the U.S., it owns 21% of its restaurants, and aims to reduce this figure to below 10% by 2011.
Yum makes an exception for China
In China, however, Yum owns 74% of its restaurants. That gives it better control over food quality and other factors in this rapidly growing market. The company should generate cash flow of about $1.3 billion or $2.70 a share in 2008. Most of that will fund its plan to buy back $1.25 billion worth of its stock this year. However, Yum also holds cash of $325 million or $0.69 a share. Long-term debt of $3.4 billion is just 18% of its market cap, so it can easily afford to borrow more to expand its operations. Yum now trades at 18.4 times its likely 2008 earnings of $1.90 a share. The $0.76 dividend yields 2.2%. Yum Brands is a buy.
