Yum Brands: A Stock With Long-Term Potential

| About: Yum! Brands, (YUM)

Yum Brands (NYSE:YUM) has performed well over the past few years. The stock has gained an astonishing 80% since 2008, while the Dow has gained 20% during the same time period. Despite this past performance, the stock has been stuck in neutral over the past few months. The stock has been held back by fears about a growth slowdown in China. However, Yum Brands has major potential over the long term.


Yum Brands has a significant presence in China and the country is crucial to the company's growth over the long term. The second largest market for Yum Brands is China. Yum Brands operated 4,493 KFC and Pizza Hut restaurants in China. Yum Brands' reputation suffered during Q1 due to reports that KFC chicken suppliers had given its poultry growth hormones. This incident was less damaging to Yum Brands sales than previously thought. The company's same-store sales in China fell by 20% in Q1 versus an earlier estimate of 25% decline. In addition, the number of negative comments about Yum Brands dropped from its peak of 3 million, but it still totals over a million. The company's operating profits declined by 6% in Q4 2012 because of negative events. KFC's sharp sales decline after the chicken scandal was announced during December helped to lower the company's profits. Yum Brands opened nearly 3 restaurants a day during Q4 2012. The company is continuing to build restaurants in China because it believes that China has long-term growth potential.

Other International Markets

Yum Brands' international business puts the company in a unique position. New unit development in places such as Africa, Vietnam, and Russia, will continue to fuel the company's growth. The company believes that Africa has endless possibilities. The continent has over a billion people, but the continent only has 1,000 Yum Brands restaurants. Richard Carucci, the president of Yum Brands, said in the conference call that there is less than one restaurants per million people in Africa compared with 58 restaurants per million people in the United States. Russia is another market that offers huge potential for the company. System sales grew nearly 46% in 2012 and the company opened nearly 40 new restaurants. The company also wants to mirror its success story in China in the rapidly growing Indian market. Despite the company's rapid growth in many foreign markets, Yum Brands still lags behind its competitors in Europe. The company operated 150 KFCs in France and about 100 KFCs in Germany in Q4, but McDonald's (NYSE:MCD) operated 2,500 restaurants in these two countries. However, the company recently became large enough to advertise in France and Germany, which should help to grow the company's European business.

United States

In addition to its rapid international growth, Yum Brands is set for success in 2013. The Taco Bell brand has momentum and the company has meaningful innovation plans at all three of its brands. The launch of the Dorito tacos was one of the company's most successful new products. Cantina Bell will also help the company to broaden the Taco Bell brand beyond its core users. Yum Brands is trying to expand the Taco Bell brand into rural areas by offering a franchisee rural incentive. The Pizza Hut brand is beginning to grow in the U.S. again despite declining for over a decade. Same-store sales grew 5% in the U.S. and operating profit grew by 13%.


The company has grown at a rapid rate of the past few years. 2011 marked the 10th-straight year that the company delivered EPS growth that was at least 13%. The TTM P/E ratio is currently 20.07, which is slightly higher than the P/E ratio of McDonald's of 18.4. The average P/E ratio for the industry is 19. The dividend yield is 2% and the company has increased its dividend rate by double digits for the eighth consecutive year. Also, the company returned over 1.5 billion in cash to its shareholders, which includes nearly a billion dollars in share repurchases. As shown in the graph below, revenue is at 5-year highs. The company has a leveraged free cash flow of 910 million.


Many investors are concerned about a growth slowdown for Yum. However, the situation in China isn't as bad as previously thought and the company's reputation in China is recovering. The poultry scandal will hurt Yum Brands, but its impact could be less than expected. Earnings growth will take a hit during 2013, but the company earnings will continue to grow at double-digit rates in 2014 and beyond. The company's expansion into emerging markets such as Turkey and Vietnam will help the company to continue to grow at such a rapid rate. The company is still the leader in international expansion in the restaurant industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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