Yum's Growth Will Come From Asia And Africa

| About: Yum! Brands, (YUM)

Yum Brands (NYSE:YUM) operates many restaurants across the world. The company has seen impressive growth in the past few years and the momentum is likely to continue for the years to come. Investors of Yum Brands have seen capital appreciation of 400% since 2004 and they should expect to continue to see good returns from this company.

In the last year, the company earned $3.16. In the next two years, it is expected to earn $3.33 and $3.76 respectively, indicating a growth of nearly 20%. In China, the company is able to post a revenue growth of 30% annually. In US the company captures an annual revenue growth of 9-10%, and half of this growth is accounted for by same-store sales while the other half is accounted for by new store openings. Same-store sales growth is expected to slow down significantly in the next several years with the exception of price increases. This is one of the reasons that Yum Brands will rely on areas outside of the US for most of its future growth.

The company plans to add 150 restaurants in Africa and another 600 in China per year in the next 5 years. The company currently has 37,000 restaurants and this number should increase by about 1,000 annually. This is a good move as average income continues to increase in both Asia and Africa as economies grow in those parts of the world. Mature economies can provide companies with stable revenues; however they are not likely to provide very much growth. Africa seems like an especially good place to seek growth as the continent is nearly untouched by restaurant chains. There is so much opportunity for growth in the continent, and as more companies move their services and operations to Africa, the average income in the continent will keep increasing, and this will drive the demand even further theret.

The most popular Yum restaurant brand in Africa is KFC. In Africa, eating out at KFC is pretty expensive compared to average incomes; however there is high demand for the restaurant as many people in the continent see it as a high status thing to eat there. Simply because KFC is an American restaurant, many Africans consider it an upscale restaurant and they don't mind paying a premium for it. Average income is expected to nearly double in Africa by 2020 and Yum Brands is well positioned to take advantage of this trend. If political stabilization is achieved in most of Africa, incomes may go up even faster than anticipated, because many companies would start investing in the continent to take advantage of cheap labor, since labor costs are increasing fast in countries like China.

Since 1987, Yum has opened more than 5,000 restaurants in China. The company recently signed a contract with Suning Appliance Co. to open 150 restaurants within Suning stores in the next 12 months. Suning is a popular outlet store selling electronic appliances in China. This outlet store has a large network of stores and it usually operates stores in prime locations. Currently Suning operates 1,700 stores and the company aims to add another 400 of these stores. The partnership with Suning will help Yum grow in China as Chinese will have much more exposure to restaurants operated by Yum Brands if they are located within their favorite outlet stores.

If we look at Yum Brands with traditional fundamental analysis, the stock seems a bit overpriced, however such analysis doesn't take future growth into account. When future growth is taken into account, Yum Brands is a stock I would recommend buying. I firmly believe that this stock will continue to outperform the market for the next decade or so.

Disclosure: I am long YUM.