The World Needs More Yum!

Shares of the largest global fast-food restaurant chain, Yum! Brands (NYSE: YUM  ) , have had a great run since being completely spun off from Pepsi (NYSE: PEP  ) back in January 1997. They fell slightly after the company reported preliminary second-quarter sales results yesterday and stood at a recent $50.45. Should the shares be placed on a Fool's value menu?

Recent results continue to demonstrate that international sales are representing the bulk of growth for the company, while domestic U.S. sales continue to be mixed, primarily because of weakness at Pizza Hut. International sales for the quarter increased 8% overall in local currency. China growth is broken out separately and was very strong, up 29% for the quarter and ahead of what most analysts had expected. Growth in China is becoming increasingly important for the company as it is growing the fastest out of any region and now accounts for over 15% of total restaurant sales. Plus, Yum! owns about 67% of its stores in that country, vs. the 23% it owns in the U.S. The number is even lower in global markets outside of the U.S and China, where close to 90% of Yum! Stores are owned by franchisees or other affiliates.

Same-store sales results in the U.S for the quarter were flat at the three main restaurant concepts because of mixed performance as Taco Bell grew 5%, KFC grew 2%, and Pizza Hut continued to struggle, falling 7%. This mostly agrees with recent trends, with KFC comps growing the fastest, Taco Bell growth strong but a bit slower at close to 5%, and Pizza Hut pulling up the rear with negative to flat comp sales.

It's useful to track shorter-term sales trends, but more important to make sure to maintain perspective on the longer-term picture and outlook. While sales have grown just under 6% on average over the past five years, management has been able to leverage that into stronger bottom-line growth as earnings have grown 13% annually over that time frame. Debt is a little high for my tastes at about 59% of total capitalization, but the company throws off consistent levels of free cash flow that are at similar levels as net income annually, even after subtracting significant capex used for opening new stores. As a result, returns on capital are near 20%, and the company is projected to be able to grow earnings by about 10% per year going forward, primarily because of international expansion prospects.

Trading at under 18 times expected earnings for this year, shares of Yum! are not a steal, but you rarely find a great business selling for bargain-basement prices. The shares have traded from the mid-$40s to mid-$50s for almost two years now. It could prove a wise decision to consider picking up some stock should it fall much below $50, especially if management is able to breathe some life back into U.S. sales trends, particularly in the pizza pie realm.

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned but is considering buying into Yum! simply because he's addicted to Taco Bell's tasty offerings. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned


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