The tide is starting to turn for Yum Brands (YUM).
Shares of parent company of KFC, Taco Bell and Pizza Hut surged Tuesday after Yum Brands indicated that the company’s problem-plagued China business was starting to show some improvements. Same-store sales at Yum’s China’s operations — YUM gets about half of its revenue from the world’s most populous country — fell 4% (3% when currency fluctuations are excluded) in the most recent quarter.
These results don’t sound great on their face, but still are noteworthy considering they came amid bird flu fears. Plus, it’s orders of magnitude better than the double-digit declines that Yum Brands has posted in recent quarters from this key market. Meanwhile, Chinese consumers are starting to view the brand more favorably thanks to an effective public relations campaign.
Chief Executive David Novak also isn’t backing away from China and plans to open as many as 700 locations there this year. Novak added that “we are confident we will bounce back strongly in 2014.”
That — and confirmation that the company is expecting at least 20% earnings growth next year — helped propel Yum Brands by almost 9% on Tuesday.
While most of YUM’s 6,200 China restaurants are KFCs, the company also has established a foothold for its Pizza Hut business, which spans more than 1,000 restaurants in nearly 250 cities. That operation is doing well. Same-store sales — a key retail metric measuring the performance of locations opened at least a year — rose 4% in the China division, helped by an expanded breakfast menu. Yum also owns Little Sheep, a popular China-based casual dining chain, which the company expects to be a “major driver of growth” going forward.
Still, while China’s business tends to grab most of the headlines about Yum Brands, there are plenty of other reasons to like YUM stock.
Yum’s business in the rest of the world appears to be robust, so it’s not surprising that Nowak told analysts: “We remain extremely bullish on our long-term prospects in emerging markets as a consuming class rapidly expands.” Sales surged by double-digit percentages in France, India and Germany/Netherlands, and grew a whopping 47% in Russia. Yum Brands also plans to add 1,ooo new locations outside China and India this year.
It’s a bit more difficult to get excited about Yum’s business in the U.S.
Gains in Taco Bell same-store sales, including last quarter’s 3% improvement, have be overshadowed by weakness in both KFC and Pizza Hut, which each posted 2% declines. Taco Bell, considered by many one the most innovative in the quick-service restaurant sector, has reported eight straight gains in same-store sales. Pizza Hut, though, is a laggard in the U.S. because, as Novak noted, “we simply weren’t competitive enough on value.”
Yum also is planning to aggressively promote KFC’s chicken wings to boost that business’s performance. Unfortunately, the road ahead for YUM’s U.S. operations isn’t easy.
Buffalo Wild Wings (BWLD) has proven to be a formidable competitor in the chicken wings business — don’t just ask KFC, but McDonald’s (MCD), whose Mighty Wings promotion flopped. And like the Home of the Golden Arches, Yum faces a slew of better-performing rivals such as Wendy’s (WEN), Chipotle (CMG) and Burger King (BKW). Chick-fil-A can’t be discounted either. The closely held chain has had 45 straight years of positive sales growth.
So, with Yum Brands facing challenges in the U.S., but at least seemingly better prospects internationally, it’s worth checking out valuation to see whether YUM stock is a buy.
And Yum Brands is a compelling value. YUM trades at 17 times forward estimates, making it much cheaper than rivals Wendy’s (30) and Burger King (29), and putting it slightly under MCD’s 19 P/E. Even after Tuesday’s run-up, Yum trades at a 12% discount to its average 52-week price target of $79.70.
Even better, analysts are expecting Yum Brands to post double-digit revenue gains over the next few quarters — far better than its peers. Plus, YUM stock also offers some protection in the form of a 2.2% dividend. Not that YUM is a buy for the yield, but it’s a small cushion that should be taken into consideration.
Personally, I would like to see more proof that Yum Brands can achieve those 20% earnings projections before considering the stock a “buy,” but the bear case certainly is there for less conservative investors.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.