Is YUM! Brands A Long Term Buy?

| About: Yum! Brands, (YUM)

Summary

By 2030 India will be the largest consuming class in the world so the company is actively investing in the Indian market to drive the company’s future growth.

Last year the new announcement regarding the new menu in its nearly 4600 restaurants in over 900 cities will help to regain sales in the Chinese market.

Considering the future prospects of the company, the stock price of $73 and forward P/E of 17.80 the company is a good investment opportunity.

YUM Brands (NYSE:YUM) has over 40,000 restaurants in more than 125 countries and territories under the brands of KFC, Pizza Hut, and Taco Bell. The overall performance of 2013 was not up to the mark and I will be briefly discussing this performance in my article. However, I believe that the Chinese and Indian markets are still showing strong growth for the company and the purpose of my article to demonstrate how these two markets and the Taco Bell Breakfast launch will further contribute towards the future success of the company.

Recent Results:

  1. Total revenues were $13 billion compared to $13.6 billion in 2012.
  2. Operating profit was $1.79 billion compared to $2.29 billion in 2012.
  3. Net income was $1.09 billion compared to $1.59 billion in 2012.

Despite the poor performance, the company is expected to deliver 20% earnings per share growth in 2014 and consistent double-digit EPS growth in the coming years. This growth is justifiable as the Indian and Chinese fast food markets remain strong and will positively contribute towards the company's top line in the future.

India:

Currently, India contributed a minor portion of total revenues in 2013 but going forward and considering the future growth prospects I believe that India will be one of YUM's major segments in the coming years.

The company opened 157 new units in 2013 and plans to open 150 new units in 2014. The country has more than 1.2 billion people and will boost the company's revenues in the long term. In the long run, the company is aiming to have 2,000 restaurants in India by 2020.

The company's investment in India still in its early stages and I believe that there is huge potential for future growth.

Future Outlook of India:

Sales of pizza, burgers, and sandwiches account for about 80% of domestic fast-food sales. The growing desire for pizzas, burgers and French fries will grow the Indian fast food market to double its current size by 2016.

As India has one of the youngest populations in the world, with nearly 65% of the population under 35 years of age, more young professionals are eating fast food in urban India. Going forward, by 2030 India will be the largest consuming class in the world ahead of the U.S. and China in the world.

China:

China is also a growing market for the company as income levels are raising and urbanization pushes fast food sales. According to market research firm Mintel, China's fast food and takeaway market is expected to reach $294 billion by 2017.

After the reported issue in China regarding poultry suppliers the company's ongoing operation Thunder initiatives will help the company to strengthen its position by rebuilding consumer trust in KFC. The company opened 428 KFCs in 2013 and is planning to open 700 new stores this year. Yum currently has four restaurants per 1 million people in China the where growing middle class is expected to grow from 300 million to over 600 million people by 2020.

YUM has been facing many problems after the media reported that the chicken it purchased had been fed excess antibiotics in late 2012 but now the company has enacted some important initiatives to track KFC's performance by introducing new products, redesigned its product packing, and the gradual roll-out of a new store design.

The updated menu includes 15 newly launched products bringing the total number of options at KFC to 66. Going forward the company plans to do similar menu updates at least once per year and I believe this is important to enhance its foothold in the competitive Chinese market.

Taco Bell Breakfast Menu:

Taco Bell rolled out its breakfast menu nationally on March 27th in the U.S. Taco Bell's breakfast menu is the brand's largest and most extensive menu since it first opened its doors more than 50 years ago. This breakfast menu will be offered at more than 5500 restaurants nationwide and featuring the unique items: the waffle taco, the A.M. crunch wrap and many more. This initiative will boost the company's top line in the coming quarters.

Valuation:

The company is trading at a P/E of 31X and when compared with main competitors such as Burger king and Chipotle Mexican Grill it indicates that YUM is trading cheaper than its peers. The stock looks even more attractive with a forward P/E of 17.8X.

Source: Morningstar

Conclusion:

I believe that China and India will remain important markets for the company in the coming years. The investment in India is still in its early stages and will soon contribute towards the company's top line and this will strengthen the overall position of the company. The investor with the long term prospective should definitely consider investing in it.

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.