Should I Buy Yum! Brands? 3 Pros, 3 Cons

by James Brumley | March 13, 2013 11:02 am

Should I Buy Yum! Brands? 3 Pros, 3 Cons

The good news is, Yum! Brands’ (NYSE:YUM[1]) January and February sales in China weren’t as bad as first thought, following a scare that the restaurants’ chicken suppliers had used excessive levels of chemicals in its birds[2]. The bad news is, Yum! Brands’ Q1 sales in China still were pretty bad in January and February, falling 20% on a year-over-year basis for the two-month span.

The mixed message regarding sales in China is but a microcosm of the tug-of-war YUM shareholders have been a part of for a while now; every success seems to be matched by a stumble.

So, should you buy Yum! Brands right now? To decide, let’s look at all the major upsides and downsides facing the company — and its owners — right now.

Cons

Health Scares: As is so often the case, a small public-health scare can have a lingering effect. During routine testing of raw chicken samples in January, regulators found modest evidence that some of the company’s KFC restaurant suppliers might have given its chickens too much antibiotic. Nothing ever really came of it, despite follow-up testing. Yum!’s Taco Bell network was implicated in a horse meat scandal just a few weeks later. The mere association with that potential risk can weigh in on consumers’ minds for a while.

31313yum 300x143 Should I Buy Yum! Brands? 3 Pros, 3 Cons
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Technicals: Although the stock’s longer-term trend is decidedly bullish, a ceiling has developed at $75. That’s where YUM topped out in April as well as in November of last year. Eventually the stock will surpass that mark, but it’s not apt to happen anytime soon, and it’s not likely to happen in a straight-line fashion.

Competent Competition: Yum’s restaurants (Taco Bell, KFC, and Pizza Hut) might make some of consumers’ favorite foods in each of their respective categories, but it’s not like other restaurants are conceding that battle. Domino’s (NYSE:DPZ[3]) put pan pizzas on the menu last year, leading to a 22% increase in Q4’s earnings. Meanwhile, Chipotle (NYSE:CMG[4]) — despite the fact that Taco Bell made a point of adding Cantina Bell items to its menu that compete with it[5] — is forging ahead with plans to triple its restaurant count in the United States within the foreseeable future. Even KFC is feeling some pressure from McDonald’s (NYSE:MCD[6]) now that eaters can find Chicken McBites and Mighty (chicken) Wings under the golden arches.

Pros

Resilience Amid Health Scares: Yum! has survived healthcare worries before. For instance, the bird flu scare of 2005 led to a 40% dip in the company’s chicken sales in China. Within a few months — thanks to some good PR work and persistence — the avian flu risks (to food) were barely even a memory. That year ended up leading the company to record-breaking profits at the time. Yum! might already be on the road to recovery following January’s setback, too; February’s same-store sales in China were up 2%.

Innovation: Just when you think the company can’t think up a new way to shill more of it stuff, Yum pulls off the biggest cross-marketing coup of all time … introducing Cool Ranch Doritos-flavored taco shells[7] at its Taco Bell restaurants; Doritos is made by PepsiCo (NYSE:PEP[8]), which provides Yum’s beverages. Even more impressive is that the fast-food-consuming public loves the product.

Earnings Stability: Though Yum! has been habitually challenged over the past several years in several different ways, the fact of the matter is that earnings have never stopped growing. They’ve barely even stumbled. Given nine straight years of successful proactive and reactive measures that have driven annual per-share profits from 94 cents in 2003 to last year’s $3.40, it’s reasonably safe to say the company knows what it’s doing, and will continue doing the right things into the future.

Verdict

Clearly it’s not without its challenges, but that’s nothing new for Yum! In fact, the specific challenges it’s facing now — safety concerns in China and competition here in the United States — are some of the biggest hurdles it’s faced in the past, and it has handled those prior hurdled pretty well (not to mention profitably).

So should you buy Yum! Brands? Yes — although the short-term-minded might not be thrilled with YUM’s near-term upside potential, long-term investors will likely find the three “cons” are nothing more than fading memories a year from now.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  2. chicken suppliers had used excessive levels of chemicals in its birds: http://investorplace.com/2013/02/yums-chinese-chicken-problem-is-overblown/
  3. DPZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=DPZ
  4. CMG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMG
  5. adding Cantina Bell items to its menu that compete with it: http://investorplace.com/2012/10/before-laughing-at-einhorns-taco-bellchipotle-theory/
  6. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  7. introducing Cool Ranch Doritos-flavored taco shells: http://money.msn.com/now/post.aspx?post=11d52d00-0ff8-4b1c-bf43-7f74bf24423f
  8. PEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEP

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