Shares of Yum! Brands
On Wednesday, Yum! reported earnings for its fiscal third quarter. China continues to drive growth at Yum!, as total sales grew 28% and reported operating profit jumped 26% in the region. The international division saw total sales growth of 6%, and an operating profit increase of 22%. To illustrate just how important China is to the company, its results are reported separately from Yum! Restaurants International, or YRI. To get total sales, just add China, YRI, and U.S. results.
U.S. results, meanwhile, continue to struggle. Total sales fell 7%, and operating profit was about flat. U.S. same-store sales growth fell 2%, as Taco Bell comps fell 2%, Pizza Hut fell 5%, and KFC was flat for the quarter. Recent Taco Bell comps were weak here at home, but the franchise has been the crown jewel for Yum! overall. KFC has seen strong growth, too, but Pizza Hut has been the thorn in the side of otherwise impressive long-term results. Again, international sales are the growth engine for the entire company, but the U.S. accounts for the majority of sales -- 57% for the third quarter.
Earnings for the quarter came in at $0.83 per share, way ahead of analyst projections of $0.75. Thanks primarily to the strong global results, management increased earnings guidance for the full year; it now expects $2.89 per share before special items. That's a couple of percent higher than the previous guidance of $2.83 per share, and it will represent a 14% increase from 2005, according to the company press release.
Overall, Yum! continues to generate impressive operating cash flow, and free cash flow tends to run ahead of reported net income. For the full year, management expects $1.3 billion in operating cash flow and $700 million in free cash flow. Based on the current diluted share count, that's just more than $2.50 per share in free cash flow, for a lofty price-to-free cash flow multiple of 23.2.
In the longer term, Yum! has been able to leverage mid-single-digit sales growth into double-digit earnings and operating cash flow growth. Over the past five years, sales have grown 6.2% annually, while operating cash flow has advanced 12.6% and net income has increased 15.2% each year over that time frame. In addition, return on invested capital consistently exceeds 20% annually.
In other words, Yum! Brands is a cash-generating machine with a number of Foolish investment characteristics. Current shareholders have seen some nice returns since the stock reached its yearly lows back in July; if you've held the shares since then, you're up almost 30%. In addition, the stock has jumped 6.5% since earnings on Wednesday.
After the recent run-up, I'm not sure now is the right time to make a stock purchase, but Yum! is one of the more compelling restaurant concepts, thanks to its international growth opportunities. McDonald's
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Fool contributor Ryan Fuhrmann is long shares of Mickey D's but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.