Today’s Buy Opportunity: Yum! Brands

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Want exposure to fast-growing China without the political risk and corporate governance problems? Yum! Brands (NYSE: YUM  ) is your meal ticket.

Yum! Brands fast facts

Market Cap $19.2 billion

Revenue (TTM)

$11.1 billion

Earnings (TTM)

$1.1 billion

Cash/Debt

$545 million / $3.2 billion

Source: Capital IQ, a division of Standard & Poor's.

Yum! is the world's largest fast-food company, with more than 37,000 Kentucky Fried Chicken, Pizza Hut, Taco Bell, Long John Silver's, and A&W units spanning the globe. But although Yum! has a presence in more than 110 countries, I’m most intrigued by its operations in just one: Liechtenstein.

Just kidding! As you've likely guessed if you watched my video on Fool.com, it's Yum!'s Chinese operations that have whet my investing appetite.

Go east, Yum! Brands
The first foreign fast-food concept to enter China way back in 1987, Yum! has built a network of nearly 3,600 locations (mostly KFCs) in the country -- three times as many locations as second-place McDonald's (NYSE: MCD  ) . Although Yum!'s recent U.S. performance has been stagnant, its Chinese operations have been firing on all cylinders. Over the past five years, revenue and operating income for Yum! China have roughly tripled, while those same metrics are down for its U.S. business. Check out the chart below to see why I’m so excited about Yum!’s Chinese opportunity:

Metric

U.S.

International

China

Locations (as of June 12, 2010)

19,573

14,051

3,590

System sales growth (2009)

(5%)

5%

9%

Restaurant margin (2009)

13.9%

11.1%

20.2%


How chicken conquered China
Exporting a successful business model from the U.S. to China is no small feat -- as even juggernauts like eBay (Nasdaq: EBAY  ) and Google (Nasdaq: GOOG  ) found out the hard way. But while those companies’ futures in China are still up in the air, there are two big reasons why I think Yum! will continue to make it rain in China.

1. Distributing more than wings
Unlike in the United States, where the company relies on third parties to route its food products, supplies, and equipment, Yum! owns and operates its Chinese distribution network. This gives Yum! a significant edge in securing low-cost supplies and establishing new locations in second-tier, or midsize, cities. Yum! can open new restaurants much faster than the competition, which has helped the company establish a presence in more than 650 Chinese cities (and counting).

2. A little local flavor
While companies like McDonald’s and Starbucks (Nasdaq: SBUX  ) have struggled to adapt their menu to suit Chinese customers’ tastes, this is an area where Yum! shines. For example, in addition to its conventional fried chicken, KFC restaurants in China serve items such as preserved Sichuan pickle and shredded pork soup; Beijing duck wrap served with scallops and hoisin sauce; and congee, a Chinese-style porridge dish.

And Yum! isn't just serving Western-style fast food. In addition to its brands that are familiar to Americans, Yum! has also invested in two new restaurant concepts. East Dawning focuses on authentic Chinese fast food, and Little Sheep Hot Pot produces Mongolian-style hot pot dishes.

A value meal for investors
With about 3,600 locations, Yum! is the top dog in Chinese fast food, but management believes its concepts have plenty of room to grow. CEO David Novak claims that China can support 20,000 units, a greater than five-fold increase from current capacity. And while the company’s Chinese operations are the main attraction at the moment, Yum!’s operations in markets like India, Russia, Korea, and France also merit excitement. With stable recurring revenue from its mostly-franchised U.S. operations, decades of growth lying ahead in the international arena, and a tasty 2% dividend yield, Yum! Brands can satisfy the cravings of every investor.

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Rich Greifner does not own shares of any company mentioned in this article. The Motley Fool owns shares of Google. Google is a Motley Fool Inside Value and Motley Fool Rule Breakers recommendation. eBay and Starbucks are Motley Fool Stock Advisor selections. The Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (52)

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  • Report this Comment On August 12, 2010, at 12:59 PM, Pick1es wrote:

    you got me with Liechtenstein, that sentence broke my brain for a second

  • Report this Comment On August 12, 2010, at 2:03 PM, plange01 wrote:

    yum is a great stock to own but wait for it to drop to the 28-30 range. its far to expensive at its current level unless you want to short it....

  • Report this Comment On August 12, 2010, at 5:41 PM, TMFTenacious wrote:

    Hi hiddenlevers,

    I agree that the rising affluence of the Chinese consumer will be a boost to YUM's sales -- but don't forget that the Chinese government is significantly boosting the minimum wage, which will jack up YUM's expenses...

    Thanks for reading!

    Rich

  • Report this Comment On August 12, 2010, at 5:57 PM, goalie37 wrote:

    You had me at Liechtenstein.

  • Report this Comment On August 12, 2010, at 8:31 PM, ripantuck wrote:

    Your write-up on this company makes it sound like an excellent long-term investment, but I simply cannot invest in a company that does as poorly in the quality of their food and service here in the USA. When you compare the consistency quality and cleanliness of their U.S. restaurants with McDonald's, Wendy's and many local and regional chains it makes me think of Woody Allen in a Sumo Wrestling match. And I absolutely love Kentucky Fried Chicken from one of their better restaurants. In others you get yesterday's chicken partially warmed up.

    Perhaps they are focusing on their growth areas, such as China, causing them to simply cut costs and make a larger profit on the declining business in the U.S. But, I don't believe it.

    The KFC brand has been up and down and owned by many since the 1960's. I just hope these guys sell it before they ruin it completely.

    My prediction is that they will begin to ignore quality in other parts of the world the same as they do in the U.S. and another big chain will simply trounce them in China. It may not be MacDonald's, but it will be some large chain or maybe a few large chains..

    Don Clark

  • Report this Comment On August 13, 2010, at 12:58 AM, philkek wrote:

    Thanks MF and other fools. Good article and thoughtful comments on YUM and other symbols. I'm interested in making money like any other fool and will work hard and foolish for the gains from my investments. Better Business Bureau warns all fools to investigate BEFORE you invest. MF gives similar good advice and I think this attitude is just great. Fool on for profits.

  • Report this Comment On August 13, 2010, at 9:23 AM, TMFTenacious wrote:

    Hi ripantuck,

    You're absolutely correct that Yum's domestic operations are a notch below competitiors like MCD and WEN in terms of quality. However, I disagree with your prediction that Yum:

    "will begin to ignore quality in other parts of the world the same as they do in the U.S. and another big chain will simply trounce them in China."

    I actually think it's more likely that Yum can learn from its success in China and apply those lessons to its U.S. operations. The company has placed a renewed emphasis on improving customer service and introducing new products in the U.S. These changes may not be visible overnight, but I believe the quality gap relative to its domestic competitiors is more likely to narrow than widen.

    Thanks for reading and Fool on!

    Rich

  • Report this Comment On August 13, 2010, at 9:28 AM, thomasjurisd wrote:

    Anyone know how long Yum has owned the KFC? The reason I pose the question is this: Back when I was in business school (mid 90's) we studied the marketing techniques used by KFC to gain entry into the Japanese market. (This was juxtaposed to other chains such as Church's Chicken who had failed miserably.) There is a documentary called "The Colonel Goes to Japan," which documents the process. It might be worthwhile to determine whether Yum was responsible for gaining entry into these foreign markets, or whether this was the brainchild of previous management and Yum is just riding the crest of the wave that has yet to break.

  • Report this Comment On August 13, 2010, at 10:59 AM, DRovito wrote:

    I like YUM (no pun intended), but I agree with pluge01 that it's too expensive, especially in this "recessionary" market. YUM's P/E = 18.4, and P/B = 16.66 (OUCH!). These ratios are significantly higher than MCD's, with a P/E = 16.4, a P/B = 5.84 (still high), and MCS sports a 1% greater DIV of 3.40 . . . and YUM is also much more leveraged.

  • Report this Comment On August 18, 2010, at 12:12 PM, mikecart1 wrote:

    YUM is a good company, but I see no 'good deal' here at these prices or the dividend. They need to raise the dividend to compete against MCD to at least 3-4%. I would definitely buy if the dividend was closer to 6% like my best friend MO.

  • Report this Comment On August 18, 2010, at 12:17 PM, Deepfryer wrote:

    How are they doing in other markets, like Latin America?

  • Report this Comment On December 09, 2010, at 4:05 PM, cvitzthum wrote:

    I bought YUM at around $34.00/share in August after reading this article and sold it in November when it hit $51.00 per share. I'll take that ride anyday.

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