Shares of Yum! Brands (NYSE: YUM ) bucked the broader market's decline Wednesday after the company stated in a recent SEC filing its May same-store sales fell an estimated 19% year over year for its China Division, including an estimated decline of 25% at KFC, and 12% growth at Yum!'s Pizza Hut locations in the country.
If you're wondering why Yum! stock didn't plummet on the news, note that 19% decline was actually in-line with analysts' estimates, and also represents a notable improvement over April's 29% same-store sales drubbing. In short, the number indicates things may finally be getting better for Yum! in the Middle Kingdom.
So, why is KFC suffering so badly in China in the first place? Remember, as I wrote in April, Yum! stock took a beating after the company faced negative publicity associated with a recent Avian flu outbreak in the region. Of course, that didn't mean their food wasn't safe to eat -- and Yum! Brands did its best to educate consumers to that effect -- but chicken-centric restaurant concepts suffered badly nonetheless.
McDonald's (NYSE: MCD ) , for example, also took a hit during April, as same-store sales for its Asia/Pacific region fell 2.9% that month, thanks largely to weakness in China. Of course, when we remember McDonald's currently operates less than one-third the total number of locations in China as Yum! Brands, combined with the fact that Mickey D's most significant market here in the U.S. is showing remarkable strength, it should come as no surprise that McDonald's investors weren't nearly as concerned as those with an interest in Yum! stock.
Even so, I remained convinced at the time that the weakness represented a fantastic opportunity for patient long-term investors to pick up shares of Yum! stock on the pullback.
Sure enough, Yum! stock has returned more than 7% since that time, beating the broader market's advance of just over 1% over the same period. Curiuosly, though, a large chunk of those gains came late last week after UBS analyst David Palmer upgraded Yum! stock from neutral to buy, with an $80 price target, almost prophetically stating he believed Yum!'s China operations would soon begin to show improvement.
What's a hungry investor to do?
With Yum! stock currently trading just 4% below its all-time highs, should investors buy now?
I certainly think so.
After all, Yum! stock is currently trading at a reasonable 22.7 times last year's earnings, less than 19 times forward estimates, which isn't a significant premium to the S&P 500's current P/E ratio around 18.6.
In addition, despite the current weakness in China, the folks at Yum! Brands intend to eventually almost triple their number of restaurants in the region to 14,000, or on par with the number of McDonald's locations here in the United States. The difference with China, however, is that its population currently stands more than four times the estimated 316 million people who reside in the U.S., so you can bet Yum! Brands will still be able to continue growing for the foreseeable future.
What's more, just a couple weeks ago Yum! outlined a perfectly reasonable plan for doubling its Taco Bell sales in the United States to at least $14 billion by 2021 through a combination of new locations, additional menu items, and more dayparts, including a breakfast lineup to be rolled out nationwide by the end of next year.
In the end, as the company continues to expand all over the globe, and when Yum!'s Chinese operations finally return to normal, it's a relatively safe bet investors who are willing to buy now and weather the current storm will be handsomely rewarded over the long run.
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