Yum - Investors Like The Taste Of The Latest Earnings Report

Oct.11.12 | About: Yum! Brands, (YUM)

Shares of Yum! Brands (YUM) rose more than 8.0% in Wednesday's trading session. The quick service restaurant known from its concepts KFC, Pizza Hut and Taco Bell, reported a strong set of third quarter results on Tuesday after the close.

Third Quarter Results

Yum! Brands reported third quarter revenues of $3.57 billion, up 9.0% on the year. Same store sales rose across the board. Same store sales rose 6% in China, 6% in the US and 2% for the international division. On average, analysts expected the company to report quarterly revenues of $3.65 billion.

Worldwide restaurant margins increased by 190 basis points to 18.9%. Margins rose across all continents, but especially the 4.6% improvement in US margins was impressive.

The company reported a 23.0% increase in net profits to $471 million. Diluted earnings per share rose by a quarter to $1.00 per share. Earnings did beat consensus estimates. On average, analysts expected Yum! to report earnings of $0.97 per share.

During the quarter, Yum! repurchased 6.5 million shares for a total value of $414 million. The company already repurchased 10.8 million shares for the year, for $702 million in total.

CEO and Chairman David C. Novak commented on the results, "Very strong sales and profit at all of our divisions, including China, Yum! Restaurants International, India and the US, drove 19% third-quarter EPS growth. Given the strength of our year-to-date results, I'm pleased to report we are raising our full-year EPS growth forecast to at least 13% excluding Special Items."

Segmental Information


The Chinese division reported a 22% sales increase on the back of 6% same store sales growth, and 192 new restaurant openings. Margins improved dramatically compared to the second quarter of 2012. Restaurant margins improved by 10 basis points compared to the third quarter last year. Operating profits rose by 24% to $374 million. The company now operates 4,932 restaurants in the country.

Yum! Restaurants International

Yum!'s international business increased sales by 4%. Sales were negatively impacted by the divestiture of LJS and A&W, and the timing of the Ramadan. Restaurant margins improved by 100 basis points to 13.3%. Operating profits rose 7% to $173 million.

United States

The US division reported a very strong same sales growth of 6%. Same store sales rose 7% for Taco Bell, 6% for Pizza Hut and 4% for KFC. Growth was accompanied by a 4.6% point increase in restaurant margins to 16.7%. Strong growth, supply chain efficiency and less discounting boosted margins. Operating profits of the division rose 13% to $162 million.


On the back of the strong third quarter earnings, Yum! Brands now expects full-year earnings per share growth to exceed 13%. Full year diluted earnings per share are expected to exceed $3.24 per share, excluding special items.

Yum! ended its third quarter with $942 million in cash and equivalents. The company operates with $3.0 billion in short and long term debt, for a net debt position of roughly $2.0 billion.

For the first nine months of 2012, the company reported revenues of $9.48 billion. The company reported a net profit of $1.26 billion, or $2.65 per diluted share. Full year revenues are expected to come in around $13.5 billion. Full year earnings per share are expected to exceed $3.24 per diluted share, based on the company's outlook.

The market currently value Yum! at $32.4 billion. This values the firm at 2.4 times annual revenues. The company trades at 22 times annual earnings.

Currently, Yum! pays a quarterly dividend of $0.34 per share, for an annual dividend yield of 1.9%.

Investment Thesis

Year to date, shares in Yum! have risen some 20%. Shares steadily rose from $60 in January to a peak of $74 in April of this year. Shares fell back to lows of $63 in the summer on the back of worries about falling growth rates in China. Wednesday's rally send shares back to highs around $71.

Over the past five years, shares of Yum! have roughly doubled. Shares rose from lows of $25 in 2009 to levels around $71 at the moment. Between 2008 and 2012, annual revenues rose from $11.3 billion to an expected $13.5 billion in 2012. Net income rose from $964 million in 2008 to $1.5 billion in 2012.

Investors are pleased with key strengths in its third quarter earnings report. China has shown a decent rebound and US same store sales grew strongly, boosting margins of the division. Investors are furthermore pleased with comments made regarding future expansion. Yum! will invest $100 million in India to double the store count to 1,000 by 2015.

Investors are pleased to see that Chinese same store sales grew at 6% during the quarter, despite a slowing economy. In comparison, same store sales growth came in at 19% during the third quarter of 2011. The Chinese division is extremely important to Yum!, generating more than half of the company's operating profits. The company plans to open 2 new restaurants per day in the country.

The last piece of good news came from the US. Yum!'s Taco Bell division introduced the new "Cantina Bell" menu which resulted in same store sales growth rates of 7%. The strong growth rate might imply that the company is taking market share away form Chipotle Mexican Grill (CMG). Chipotle guided for flat same store sales growth in the second half of 2012. Furthermore, growth at Pizza Hut and KFC has been resilient as well.

I think Yum! offers an excellent long term investment opportunity for investors. The company has diversified operations and is very geared towards future growth. The company's operations in China are very extensive, and so are future growth plans in the country. Yum! is not carrying too much debt, trades at an ambitious 22 times annual earnings, and pays a reasonable dividend yield of 1.9%.

Disclosure: I am short CMG. 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.