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Yum! Brands Obsessed With China
Yum! Brands (NYSE:YUM) released its Q3 earnings report on Tuesday and for the most part, it was good news: the company posted 7% growth in overall sales, mostly thanks to overseas sales, especially in China. YUM now operates 37,000 restaurants in 110 countries across the world, including Taco Bell, KFC and Pizza Hut, but recently singled out China as the driver of its fortunes going forward. The strategy is risky, but so far, it's paying off. But can it keep working? Read on for a look at YUM's recent earnings report, and where the stock could be headed.
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Third-Quarter Sales Review
Total company revenue, which includes sales from company-owned stores and franchise fee income, improved 3% to $2.9 billion. China sales jumped 20% and now account for more than 41% of the total top line. The U.S. division accounted for just over one-third of total sales but reported an 8% decline as a result of stores being sold off to franchisees. Management is targeting the KFC and Pizza Hut chains for divestment and the company has sold off 98 stores so far this year. Yum! International is the third segment; it logged a 4% decline to account for the rest of quarterly sales.
The company's system as a whole includes company-owned and franchised restaurants. China, which consists mostly of KFC stores, reported 19% growth on the opening of 90 new stores during the quarter and positive same-store sales growth of 6%. Operating profits jumped 24%. Yum! International saw 7% sales growth as operating profits improved almost 4%. The U.S. saw about 1% growth in sales and operating margins. (For more insight, see Sinking Your Teeth Into Restaurant Stocks.)
Quarterly Profit Recap
The company was able to hold costs steady, leverage the low single digit sales increase to 16%, and boost operating profit growth to $544 million. Higher income taxes limited the net income increase to 7%, or $357 million. This worked out to 74 cents per diluted share and came in ahead of analyst projections.
Outlook
Analysts currently project full-year sales growth of just over 4% to $11.3 billion. The company boosted its earnings guidance slightly and now expects year-over-year growth of 14% to $2.48 per share. This would represent nine straight years of double-digit earnings growth.
The Bottom Line
Yum! shares have trended steadily upward over the past couple of years and now trade at a forward P/E of about 19. This is toward the high end of the company's five-year range and discounts several years of double-digit profit growth.
Relying so heavily on one country is another investment drawback. China does have stellar growth potential but a hiccup in the growth story would have a rather large adverse impact on the overall company. To justify the more lofty valuation, investors should demand better domestic results and stronger international growth outside of China.
Despite these concerns, Yum! has an enviable performance track record and represents a great opportunity for investors to gear their portfolios to growth in the Chinese restaurant market. Burger King (NYSE:BKC) has its sights set on overseas, but will soon be taken private (yet again), while Wendy's/Arby's (NYSE:WEN) and Jack in the Box (Nasdaq:JACK), along with casual-dining leader Darden Restaurants (NYSE:DRI), operate primarily in North America. (For related reading, take a look at Investing In China.)
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IN PICTURES: 5 "New" Rules For Safe Investing
Third-Quarter Sales Review
Total company revenue, which includes sales from company-owned stores and franchise fee income, improved 3% to $2.9 billion. China sales jumped 20% and now account for more than 41% of the total top line. The U.S. division accounted for just over one-third of total sales but reported an 8% decline as a result of stores being sold off to franchisees. Management is targeting the KFC and Pizza Hut chains for divestment and the company has sold off 98 stores so far this year. Yum! International is the third segment; it logged a 4% decline to account for the rest of quarterly sales.
The company's system as a whole includes company-owned and franchised restaurants. China, which consists mostly of KFC stores, reported 19% growth on the opening of 90 new stores during the quarter and positive same-store sales growth of 6%. Operating profits jumped 24%. Yum! International saw 7% sales growth as operating profits improved almost 4%. The U.S. saw about 1% growth in sales and operating margins. (For more insight, see Sinking Your Teeth Into Restaurant Stocks.)
Quarterly Profit Recap
The company was able to hold costs steady, leverage the low single digit sales increase to 16%, and boost operating profit growth to $544 million. Higher income taxes limited the net income increase to 7%, or $357 million. This worked out to 74 cents per diluted share and came in ahead of analyst projections.
Analysts currently project full-year sales growth of just over 4% to $11.3 billion. The company boosted its earnings guidance slightly and now expects year-over-year growth of 14% to $2.48 per share. This would represent nine straight years of double-digit earnings growth.
The Bottom Line
Yum! shares have trended steadily upward over the past couple of years and now trade at a forward P/E of about 19. This is toward the high end of the company's five-year range and discounts several years of double-digit profit growth.
Relying so heavily on one country is another investment drawback. China does have stellar growth potential but a hiccup in the growth story would have a rather large adverse impact on the overall company. To justify the more lofty valuation, investors should demand better domestic results and stronger international growth outside of China.
Despite these concerns, Yum! has an enviable performance track record and represents a great opportunity for investors to gear their portfolios to growth in the Chinese restaurant market. Burger King (NYSE:BKC) has its sights set on overseas, but will soon be taken private (yet again), while Wendy's/Arby's (NYSE:WEN) and Jack in the Box (Nasdaq:JACK), along with casual-dining leader Darden Restaurants (NYSE:DRI), operate primarily in North America. (For related reading, take a look at Investing In China.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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