Here's Why Yum! Brands Is Worth Considering Now

Although Yum! Brands has struggled in recent quarters, the company's latest earnings results indicate that management has successfully weathered the storm in China and is ready to deliver high growth once again.

Apr 30, 2014 at 11:30AM

After struggling for many quarters in the Chinese market, global restaurant company Yum! Brands (NYSE:YUM) appears to have finally turned a corner. Better-than-expected results in the region helped Yum! Brands beat first-quarter consensus earnings estimates. When compared to the recent results from global competitor McDonald's (NYSE:MCD), Yum! Brands' solid earnings beat looks even more impressive.


Source: Yum! Brands. 

Yummy earnings beat
Year over year, first-quarter net income rose 18% to $339 million, and adjusted earnings per share rose 24% to $0.87. Meanwhile, revenue grew 7% to $2.72 billion. EPS managed to beat the average analyst estimate of $0.84, but Yum! Brands' revenue results fell short of the consensus estimate of $2.79 billion.

In the quarter, Yum! Brands grew its worldwide system sales 4% while increasing its worldwide restaurant margin by 3.3% to 19.2%. The main growth driver was the company's China division, which accounts for roughly half of Yum! Brands' total business.

In China, total sales increased 17%. This was largely driven by a robust 9% gain in comparable sales and 7% unit growth. The restaurant margin also increased 6.8 percentage points to 23.4%.

Chairman and CEO David Novak explained: "Looking ahead, we have significant building blocks in place in China and each of our divisions to drive sales and profit growth this year and beyond."

The latest results also indicate that Yum! Brands is very much a global company at this point. Eighty-six percent of the company's 249 new stores were opened in emerging markets, and China is expected to continue being a large part of that moving forward. On further expansion in the area, Novak said: "Given the strength at both KFC and Pizza Hut, we expect to open at least 700 new restaurants in China this year as we further capitalize on our leading position in the number-one retail opportunity in the world."

Forgetting China for a moment, the company is still opening new stores at a feverish pace. Management stated that it expects to open a record 1,250 new international restaurants, "outside of China," in the current year. Novak explained, "These new units further strengthen our lead in emerging markets where we continue to have positive momentum." 

How does McDonald's stack up?
Recently, McDonald's reported first-quarter earnings results as well. When compared to Yum! Brands, the results were not at all impressive. McDonald's only grew total revenue 1% in the first quarter. However, the company's global comparable sales increased by only 0.5%, which was a direct result of weak consumer traffic in key markets like the U.S., Asia-Pacific, the Middle East, and Africa. Diluted earnings per share decreased 4% to $1.21.

Looking ahead, analysts expect Yum! Brands to solidly outperform McDonald's as well. According to Yahoo! Finance, Yum! is projected to grow revenue 11.1% and EPS 22.9% in 2014, while McDonald's is only projected to grow revenue 3.4% and EPS 4.5%. 


Source: Yum! Brands. 

Bottom line
Yum! Brands seems to have successfully weathered the storm in a massive China market after headwinds that were caused in part by an outbreak of the avian flu and quality concerns regarding the company's food. As a result, both revenue and earnings growth are projected to bounce back rather sharply in fiscal 2014, and the company's first-quarter results indicate the growth story is already well under way. Accordingly, investors seeking robust growth in the global restaurant industry have few better alternatives to consider at the current time than Yum! Brands.

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Philip Saglimbeni has no position in any stocks mentioned. The Motley Fool recommends and 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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