How many investors have looked into Yum! Brands (NYSE:YUM) enough to know that it is so very close to being as much of an emerging markets play as an operator of quick service restaurants in developed countries? The story of how this company saw the growth potential of China and other markets long ago and positioned itself accordingly is a great story for another day, but for now the earnings at this global restaurant operator are what should be in focus.

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The Quarter That Was
Overall sales climbed 3% for the third quarter, reaching almost $2.9 billion. Somewhat remarkably, China is now the largest revenue contributor to the firm - revenue from China rose 20% to about $1.2 billion, while U.S. revenue dropped 8% to $970 million. China's same-store sales grew 6%, and while this benefited from the company's involvement in an exposition, the overall momentum is simply stronger than that of rivals like McDonald's (NYSE:MCD). Elsewhere, the company saw international same-store sales growth of 1%, and similar 1% growth in the United States.

Profitability was likewise better this quarter. Gross profits climbed almost 11% and the gross profit margin increased by nearly 200 basis points. The company did even better on the operating side, though, as the operating margin also improved nearly 200 basis points and operating income grew more than 14% from the year-ago level. In China, profits were up 24%, while international profit growth was 18% and US profits fell by 2%.

The Road Ahead
Simply put, the company's future is in emerging markets. Not only is Yum exceedingly successful in China already, but they are laying similar foundations for growth in markets like Russia, India, Nigeria and Vietnam. These markets will not boost profits all that much today or tomorrow, but as the China example shows, they could be very significant in the future.

In the U.S., though, I am not sure how many more tricks the company has up its sleeve. Rivals like Domino's Pizza (NYSE:DPZ) and Papa John's (Nasdaq:PZZA) are going to continue to chip away at the Pizza Hut business. Competition for KFC might be less obvious (apart from AFC Enterprises' (Nasdaq:AFCE) Popeye's chain), but the performance here has not been great. Likewise, it is an open question of just how many more combinations of tortillas, ground beef, lettuce and cheese Taco Bell can invent. (For more, see Sinking Your Teeth Into Restaurant Stocks.)

The Bottom Line
Cynicism about Yum's U.S. operations aside, there is a lot to appreciate with the company's model and prospects. The company clearly has momentum on its side, and double-digit earnings growth (not to mention incredible emerging market exposure) is nothing to sneeze at. All in all, this is a stock that could continue to do well in the short-term. While the long-term fortunes of this business also look promising, the stock seems to be discounting quite a lot of that already. In other words, momentum investors might want to check this one out, and existing shareholders have plenty of reasons to hold on, but long-term value investors might not see enough potential here to justify an investment at these prices. (For related, see Private Equity Has A Hankering.)

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