Yum! Brands Trading At Fair Value

Yum! Brands (NYSE:YUM) reported second-quarter financial results on Tuesday that demonstrated a steady focus on growth outside of the U.S. China remains its top priority, and though domestic trends remain tepid, management was able to control costs at home and minimize a hit to profits.

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Second-Quarter Overview
Total revenues grew 4% to $2.6 billion, which consisted of a 3% rise in company sales to $2.2 billion and a 9% boost in lucrative franchise and license fees to $354 million. System sales, which include company-owned and franchised restaurants, rose a respectable 4% on modest growth in the U.S. and the international segment, and continued a very healthy trend in China as sales improved 15%.

Reported company sales in China grew 22% to account for 39% of total sales. The international division, which includes every foreign location except China, reported 6% top-line growth to account for 27% of the total. The U.S segment was reported to have a 12% sales decline to account for the rest of sales, though management has been actively selling off company-owned stores to franchisees to focus on more favorable international growth prospects.

Cost controls boosted U.S. operating income 10% to $184 million. Operating profits grew double digits in international and China, increasing 21% and 33%, respectively, for a combined operating profit of $261 million. Higher income taxes sent total company net income down 6% to $286 million, or 59 cents per diluted share. This came in ahead of analyst projections.

Outlook
Yum! raised its full-year earnings outlook to a range of $2.39 and $2.43 per share for year-over-year growth of 12%. Analysts currently expect full-year sales growth of 3.7%, and for sales to slightly exceed $11.20 billion.

Shares of Yum! currently trade at a forward P/E ratio of 14.59. Free cash flow should exceed $1 billion for the full year and come in slightly below projected net income levels. The PEG ratio sits at 1.38. Overall, these aren't rock-bottom multiples, but they aren't excessive either considering that Yum! plans on growing profits in excess of 10% for the ninth consecutive year.

Bottom Line
Yum! is also a rare opportunity to profit from overseas restaurant growth prospects. Casual dining leaders, such as Darden Restaurants (NYSE:DRI) and Brinker (NYSE:EAT), have minimal sales outside North America, as do fast food rivals Wendy's/Arby's (NYSE:WEN) and Jack in the Box (Nasdaq:JACK). (We provide some classic and lesser-known titles to add to your collection. Check out Investing Books It Pays To Read.)

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