Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Yum! Brands Improving in China: Time to Buy?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Yum Brands! (NYSE: YUM  ) delivered better-than-expected earnings for the fourth quarter of 2013. The company seems to be slowly turning things around in China, and the stock is reasonably valued when compared against industry peers like McDonald´s (NYSE: MCD  ) , Chipotle Mexican Grill  (NYSE: CMG  ) , Burger King (NYSE: BKW  ) , and Wendy´s (NASDAQ: WEN  ) . Is it the right time to invest in this global fast-food powerhouse?

A Chinese new year
Worldwide system sales increased by 3% prior to currency translations. This includes a 3% increase in China, a strong 6% growth rate in the international division, and an uninspiring 1% decline in system sales in the U.S. Earnings per share, excluding special items, came in at $0.86 for the fourth quarter of 2013. This was better than the $0.80 per share expected on average by Wall Street analysts.

One of the biggest positives form the earnings announcement is that management reaffirmed guidance of at least 20% earnings-per-share growth in 2014. This may indicate that the company is successfully turning around its operations in China, a crucial market for Yum! Brands that was materially affected by safety concerns regarding its KFC poultry suppliers in December of 2012.

New avian flu cases have been reported in China lately, but CEO David Novak said during the press conference that the company is not seeing any meaningful impact on sales. Yum! Brands is strengthening its supply chain in China via its Operation Thunder initiatives, and it has also embarked on a series of efforts to improve customer perceptions regarding food safety at KFC. According to management, the company has made "significant progress in rebuilding consumer trust at KFC."

KFC same-store sales in China declined by 4% during the quarter, which is something the company had already anticipated. Yum! Brands is not completely out of the woods when it comes to China, but sales have been stabilizing during the last few quarters, and the company could easily deliver better performance in the country in the years ahead.

Besides, Yum! Brands still has a lot of room for international expansion into other emerging markets. India is looking like a particularly attractive opportunity in the middle term, considering that systemwide sales in the country increased by 22% during the last quarter.

Fair valuation
When compared against competitors such as McDonald's, Chipotle Mexican Grill, Burger King, and Wendy's, Yum! Brands looks reasonably valued.

Data Source: FinViz.

Chipotle is materially more expensive than the other companies in the group, but there are valid reasons for that price tag, because the organic burrito company is delivering extraordinary growth for investors, and positioned to continue outperforming for years to come.

McDonald's, on the other hand, is having serious difficulties when it comes to increasing sales. The fast-food giant has delivered stagnant revenues over the last several quarters. Menu innovations have not produced the desired response from customers, and service quality is becoming a problem for the company lately. McDonald's is quite cheap, but that's because of the company's lackluster growth rates of late.

Burger King and Wendy's are both doing better than McDonald's, even if they are no match to Chipotle when it comes to growth rates. Burger King has made an impressive comeback during the last few years, revamping its stores, and introducing successful products like its lower-calorie french fries, Satisfries.

Wendy's is following a similar path, restructuring operations, and focusing on menu innovations to attract customers. Products like its Pretzel Bacon Cheeseburger and Pretzel Pub Chicken sandwich have been smart moves by the company lately, so Wendy's seems to be moving in the right direction.

Yum! Brands is cheaper than all the companies in the group except for McDonald's when looking at P/E and forward P/E ratios. While McDonald's pays a much higher dividend yield, Wendy's beats Yum! Brands by a small margin when it comes to dividends.

All in all, Yum! Brands is attractively valued in comparison to other industry players. And if the company manages to definitively turn things around in China, the stock could offer substantial upside potential from current levels.

Bottom line
Yum! Brands seems to be making some progress in China, even if the company is not completely out of the woods at this stage. In addition, other emerging markets are showing promising growth prospects in the coming years. The stock is moderately valued in comparison too peers, so Yum! Brands looks well positioned to deliver tasty returns for investors in the coming years.

Stocks to retire wealthy
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Read/Post Comments (2) | Recommend This Article (1)

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 February 06, 2014, at 9:04 AM, mwilk wrote:

    Time to buy was probably Monday before the 9% pop. I'm long YUM and have been for three years. Buying on the dips makes sense as this stock still has great international growth potential. Fixing the China problem is all upside, in my opinion.

  • Report this Comment On February 06, 2014, at 10:04 AM, ChinaFinancial wrote:

    CAT Vs YUM I prefer to long CAT

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2824895, ~/Articles/ArticleHandler.aspx, 8/29/2015 8:40:09 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:06 PM
YUM $81.82 Down -0.45 -0.55%
Yum! Brands CAPS Rating: ****
BKW $0.00 Down +0.00 +0.00%
Burger King Worldw… CAPS Rating: *
CMG $721.20 Down -5.97 -0.82%
Chipotle Mexican G… CAPS Rating: ***
MCD $96.25 Down -0.23 -0.24%
McDonald's CAPS Rating: ***
WEN $9.22 Down -0.03 -0.27%
The Wendy's Compan… CAPS Rating: ***