Look Out McDonald's, Here Comes Taco Bell With Its Breakfast Menu

While KFC gets most of the headlines for Yum! Brands (NYSE: YUM  ) , the one brand investors need to start paying attention to is Taco Bell. You see, Yum! Brands has grown KFC to become an international brand and the largest-quick service restaurant in China. However, that is not the case with Taco Bell.

Taco Bell is still predominantly a U.S. chain with only 1% of its locations internationally. The chain contributes more than 60% of total profits for Yum! Brands and its U.S. operations. With  a new breakfast menu, Taco Bell has plenty of potential for Yum! Brands. By adding breakfast to its menu, it opens up the door for Yum! Brands to pursue new markets for Taco Bell and continue growing the brand.

Getting into the breakfast business is a direct challenge to McDonald's (NYSE: MCD  ) and its breakfast menu. Breakfast is a popular and profitable business for McDonald's. Matter of fact, McDonald's has been toying with the idea of offering breakfast around the clock. The new breakfast menu from Taco Bell looks to eat into some of McDonald's business and capture this important time of day. For us Fools, who doesn't love a good breakfast?

What's on the menu?
The new breakfast menu will be available at all Taco Bell locations next year. The menu certainly looks appetizing. There's the famous waffle taco, which is a warm waffle wrapped with a sausage patty and scrambled eggs and a side of syrup. You can also get the a.m. Crunchwrap with either bacon or sausage; it comes with eggs, melted cheese, and crispy hash browns wrapped in a warm tortilla.

Other items include Cinnabon Delights, steak and egg burritos, bacon and egg burritos, sausage and egg burritos, and bacon or sausage a.m. grillers. For beverages, there's premium coffee, Tropicana orange juice, and the all-new Mountain Dew KickStart, a caffeine-fueled orange citrus drink.

That's not all, fellow Fools
While McDonald's has been bumping up the prices on its value menu, Taco Bell is sticking to and expanding its $1 menu. This affordability is really making Taco Bell stand out among other fast-food chains. Some new items added to this menu include a beefy cheesy burrito, shredded chicken mini quesadilla, spicy beef mini quesadilla, spicy potato soft taco, and a beef crunchito. These items are in addition to other favorites like triple-layer nachos, beef nacho loaded grillers, cheesy roll-ups, and cheesy bean and rice burritos. Besides the value menu, we can't forget the company's famous Doritos Locos Tacos.

Plenty of growth ahead
Yum! Brands has big plans for Taco Bell. By 2022, the plan is to double sales from $7 billion to $14 billion. The best part for investors is that Taco Bell sports impressive margins. The current profit margin is 18%, which is among the highest in the restaurant space. Going forward, Yum! expects 5% profit growth at Taco Bell and intends to open 190 new locations this year...plus more than 200 in 2015.

Yum! Brands management is certainly excited about the growth prospects of Taco Bell. Chief executive officer David Novak said, "The good news is that based upon our extensive market test, 90% of the breakfast sales are incremental, and it looks like the breakfast advertising is also driving total brand sales."

The advertising campaign is certainly resonating in the ad world. The chain's "Live Mas" campaign earned Taco Bell the honor of being named the Marketer of the Year by Advertising Age for the entire consumer-goods industry.

How do things look for shareholders?
One great thing about Yum! Brands is that the company generates a tremendous amount of cash and it is returning a good portion of that to shareholders in the form of dividends and share repurchases. Since 2004, the company has returned more than $11 billion to shareholders. So far this year, Yum! has repurchased $708 million of its shares and just increased its authorization program by $750 million.

Over the past year, shares of Yum! Brands lagged the overall market after posting a rise of slightly more than 12%. Shares are trading at 20 times next year's earnings and pay a 2% dividend yield. The company has $753 million on its balance sheet to finance growth and pay dividends.

Shareholders of McDonald's have fared slightly worse this year. Shares are up only 7% this year, but the dividend yield of 3.3% is one of the highest in the restaurant industry. McDonald's trades at 16 times next year's earnings.

Foolish assessment
Given the company's growth plans, 2014 is going to be much better for Yum! Brands and its shareholders. Things are starting to look a little better for KFC out of China. In November, same-store sales for KFC increased 1% in the country.

Next year, the company is forecasting earnings-per-share growth of 20%. I see a good portion of this growth coming from Taco Bell and its new breakfast menu. Taco Bell has done a great job improving its menu and it remains a popular spot for everyday value lovers. For this new year, us Fools should pick up a waffle taco for breakfast and keep a closer eye on shares of Yum! Brands.

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Read/Post Comments (10) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 05, 2014, at 1:50 PM, MandiM wrote:

    Doesn't do me any good. Taco Bell has never served coffee so I never eat there. Not everyone drinks soda or iced tea.

  • Report this Comment On January 05, 2014, at 2:01 PM, GT6 wrote:

    That's what we need, a prune burrito to get you going in the morning.

  • Report this Comment On January 05, 2014, at 6:12 PM, johsands65 wrote:

    Taco Bell tried the breakfast thing back in the 80's and it lasted only a few months so why try again ??

  • Report this Comment On January 05, 2014, at 7:37 PM, TimothyT wrote:

    They should call a brunch menu. The Taco Bell I go by almost every day has long had a sign advertising a breakfast menu. But, as they don't open until after the start of my work day or the children's school day it isn't at all an option. Across the street every day the McD's double drive thru is packed and the independent Mexican Fast Food place has a busy drive thru (and more flavorful food) while the Subway on the same corner is busy even without the drive thru.. They could possiblly take business from the one on price, but not if they are going to open til than 8 am. Why invest the capital?

  • Report this Comment On January 05, 2014, at 9:24 PM, Zmeister3141 wrote:

    Taco Bell needs to serve COFFEE with it's breakfast!!!!

  • Report this Comment On January 05, 2014, at 10:42 PM, Aniphx wrote:

    I'm not sure why people keep talking about their lack of coffee when this article is listing premium coffee as one of the new menu additions.

  • Report this Comment On January 05, 2014, at 11:20 PM, DevonShire123 wrote:

    Look out colon cancer, here comes stomach cancer! Either way, it's cancer, folks.

  • Report this Comment On January 05, 2014, at 11:36 PM, frellmedead wrote:

    Half the price, and twice the diarrhea.

  • Report this Comment On January 06, 2014, at 1:08 AM, lordraptor1 wrote:

    I quit going to taco bell when they ditched their Spanish rice for that new crap they have, sorry but the doritos locos tacos are not enough to make me want to go there especially when you factor in I have been making nacho versions for years with taco bell taco seasoning, lean ground beef, and doritos chips, if anything taco bell's corperate office owes me money for making the tacos with doritos since like I said I have been making nachos at home for years like that.

  • Report this Comment On January 06, 2014, at 1:56 AM, Bunnyking77 wrote:

    Just yesterday I made a pancake taco with bacon and eggs.

    OMG copy cats!

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