Kudos to Yum! Brands, Inc. (NYSE:YUM) for a third-quarter earnings beat that sent YUM stock up 6% on Nov. 2. Shares had been stagnant for months on concerns the fast food restaurant powerhouse was facing a stiff headwind and, though sales fell a bit, earnings as well as revenue were both better than anticipated.
Along with the Q3 earnings report, though, Yum Brands also offered YUM stock holders a glimpse into the future, announcing it intended to grow system sales at an annual clip of 7% through the end of 2019. More impressive is that the company intends to do it organically rather than through acquisitions, expanding its overseas exposure after selling a huge swath of its restaurants in China to franchisees a year ago.
It’s a lofty goal at a time when shares are priced anything but cheap. The company’s plans and the stock’s price are more believable and more palatable than they may seem at first glance, though.
Yum Brands Is Firing on All Cylinders
For those who don’t know, Yum Brands is the parent company of fast food chains Taco Bell, KFC (though you may know it better as Kentucky Fried Chicken) and Pizza Hut. With a total unit count of 44,000, it’s technically bigger than McDonald’s Corporation (NYSE:MCD), which boasts more than 36,000 locales. None of Yum’s individual brands operate more stores than the rival burger chain does, however.
That may well change in the foreseeable future, though. After releasing the company’s most recent quarterly report, CEO Greg Creed explained Yum could “easily double” the number of restaurants in operation by the year 2020, adding, “We want to bring the great taste of our food to the world.”
Yes, it was a not-so-veiled way of saying international expansion would be the organization’s big growth engine, driven by establishing more of the same restaurants already in its portfolio. Toward that end, Creed made it clear in late October that, “You never say never. But I believe I’ve got the organization focused on how we accelerate growth with these amazing brands.”
The mission does raise questions for those who know the YUM stock story well, however. Chief among them is how the company’s restaurants will be accepted outside North America.
Global consumers may be more familiar with Yum’s brands than you might think. KFC, its biggest division, is being embraced in sub-Sahara Africa, with its 1,000th unit opening there at the end of last year. In September of last year YUM opened its first Taco Bell in Brazil, with at least 100 more planned in that country within five years. China, Canada and India are also due for 100+ Taco Bells by 2022.
Meanwhile, even a once-struggling Pizza Hut is starting to show new signs of life.
Though Pizza Hut has a decent international presence, the majority of its revenue is driven domestically, which is a problem in light of the fact that rivals Papa John’s Int’l, Inc. (NASDAQ:PZZA) and Domino’s Pizza, Inc. (NYSE:DPZ) have slowly chipped away at Pizza Hut’s market share over the course of the past several years. Pizza Hut’s sales were up 3% last quarter on a year-over-year basis, though, and higher to the tune of 1% on a same-store-sales basis. It was the fifth straight quarter of same-store-sales growth for Pizza Hut, with enough of that improvement coming from the United States to turn heads that hadn’t been looking.
At least some of Pizza Hut’s turnaround can be attributed to a $130 million investment the parent company committed to earlier this year. But some of that growth also has to be attributed to the company just doing the pizza business smarter. A loyalty program and more delivery drivers are two such initiatives that have helped turn Pizza Hut around.
Looking Ahead for YUM Stock
This is a Yum Brands growth zeal (and traction) we haven’t seen in a while, perhaps prompted, in part, by the fact that the company is no longer bogged down by store ownership in China. It simply collects royalty payments from franchisees there. It’s higher-margin revenue, freeing up time and cash flow for other, more important matters, like the aforementioned growth.
Buying into the restaurateur’s growth initiative won’t come cheap, mind you. YUM stock is presently priced at about 25 times next year’s projected earnings. That’s not overly rich by restaurant standards. McDonald’s stock is trading at a forward-looking P/E of 24, while Papa John’s stock is priced at an earnings multiple of around 20 on a forward-looking and trailing basis.
In light of the possibility the market may be underestimating Yum Brands’ growth potential, though — and bear in mind it’s topped earnings estimates four quarters in a row now — this may well be a name worthy of buying at a premium.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
