3 Reasons Yum! Brands Inc. Stock Could Rise

Yum! Brands, Inc. hopes to make Taco Bell, KFC, and Pizza Hut even tastier.

Aug 19, 2014 at 8:54AM

Despite its unfortunately hokey name, Yum! Brands (NYSE:YUM) remains a juggernaut in the quick-service restaurant universe. Watching over Taco Bell, KFC, and Pizza Hut helps provide Yum! Brands with diversity across three entirely different categories.

Since it seems as if all good things come in threes, let's keep rolling with that theme as we dive deeper into the KenTacoHut parent. Let's explore three catalysts that could help drive Yum! Brands' stock higher if the market is kind. 

1. KFC in China can accelerate its turnaround

A big part of the Yum! Brands success story in recent years has been the success of KFC in China. In fact, its quarterly financials make it a point to break out its fiscal performance in the world's most populous nation. It's easy to see why, since China accounted for 91% of KFC's operating profit in 2013.

With 4,653 KFC and 1,134 Pizza Hut eateries in China, this is a pretty big deal. KFC's magnetic appeal in China has been a big driver for Yum! Brands, but that strength became a weakness several quarters ago when it began to sputter on supplier and flu concerns. A poultry supply incident in late 2012 carried over into Chinese media drumming up Avian flu concerns in early 2013, resulting in a dramatic drop in traffic.

That situation remedied itself during the first half of this year. System sales in China grew 25% during Yum! Brands' most recent quarter, fueled by a 15% spike in same-store sales. However, keep in mind that comps slumped 20% in the prior-year quarter. In other words, we're still not back to where we were two years ago in terms of same-store sales. But we are seeing that trending in the right direction. That's important since Yum! is targeting 700 new restaurants opening in China this year.

However, the rest of 2014 will be challenging after Yum! Brands revealed in late July that a KFC supplier in China was using tainted and expired meat. Yum! Brands broke ties with the supplier, but negative reports in China have resulted in a sharp decline in traffic. The current quarter may be a rough one for KFC, but if it's able to bounce back faster than it did during the the late 2012 incident, the recent dip may be a buying opportunity.  

2. Taco Bell can keep raising the bar in menu innovation

Few menu additions have been as game-changing as 2012's rollout of Doritos Locos Tacos at Taco Bell. The chain sold 825 million of the tacos served in Doritos-dusted shells through its first two years of availability. The spike in traffic has resulted in positive comps in nine of the past 10 quarters.

Taco Bell raised the stakes in late March by rolling out a national breakfast menu. The publicity generated by its head-turning Waffle Taco helped Yum! Brands bounce back from the chain's first quarter of negative comps in more than two years during this year's first quarter. Same-store sales in the U.S. inched 2% higher during the second quarter, the first full period of breakfast availability. That may not be much of an uptick for a period given Taco Bell extending its operating hours earlier in the day to grab breakfast traffic, but now the key is to see momentum build. There's a lucrative market to be had in morning commuters, and that should play out for Taco Bell in the next few quarters. Along the way we'll see if it raises the bar beyond Doritos Locos Tacos and June's introduction of the decadent quesarito.  

3. Yum! Brands may be able to profit from a spinoff

These may be challenging times for the restaurant industry, but several eateries have been able to cash in by going public. Naturally this leads to speculation that Yum! Brands may want to unload one of its chains to see if the parts are worth more on their own than the sum of the parts. Yum! Brands could also decide to simply spin off its operations in China or India, where KFC and Pizza Hut continue to expand their presence.

Yum! Brands has never suggested that this will happen. There are synergies behind keeping all three concepts in place. However, if consumer demand for stand-alone chains continues, it wouldn't be a shock to see Yum! Brands either unload a poorly performing concept or see what kind of market premium a top performer can generate on its own.

Let's go from the dining room into the living room
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