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

Taco Bell is launching a new breakfast menu in a bid to further boost sales and challenge McDonald's.

Jan 5, 2014 at 12:00PM

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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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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