I've called Yum! Brands
So why don't you own shares of this super play on the growth of the international middle class? Taking a cue from superinvestor Charlie Munger, who advised investors to always invert their thinking, I'm detailing three reasons you don't want to own Yum! Brands.
Reason 1. You've got faster-growing markets than China to invest in
Yum! is a powerhouse in China, especially with its KFC restaurant chain. In the most recent quarter, operating profit in China was up 24%. In fact, China is vastly more profitable for the company now than the U.S., as restaurant margins in China ticked up 90 basis points to 25.2%, and same-store sales came in at 6%. Overall, China sales jumped 19%.
Maybe that type of performance isn't good enough for some investors. So you might not like superstars such as Coach
Reason 2. You hate predictable, growing businesses that spin out dividends
The operating profit in Yum!'s international division (which excludes China) were also up some 18%. While U.S. operating profit was down 2%, the company is still doing well enough that it raised its full-year guidance, to $2.43 to $2.48 per share. If it hits the top end of that guidance, Yum! would grow EPS at 14% for the year, marking the ninth straight year that it will have grown EPS by more than 10%.
But wait, there's more!
Yum! has already stated that it sees room for 20,000 of its restaurants in China. It has less than 20% of that number now, meaning that there's a lot of growth left. That type of outlook has CEO David Novak crowing: "I wouldn't trade our long-term position in China with any consumer company in the world."
Superstars such as Starbucks
Based on Yum!'s strong performance and outlook, the company raised its dividend by 19%, and it's now paying a forward rate of 2.2%. But perhaps that increase wasn't enough, so you might not like high-performing dividend stocks such as McDonald's
Reason 3. You hate stocks trading at reasonable valuations
For the quarter, Yum!'s sales notched up 3%, while earnings were up 7%. While that doesn't sound like a whole lot, you're also not paying too much for that growth either, at around 21 times earnings. Compare that with highflier Chipotle
And other great values have quite moderate P/Es and good opportunities: Best Buy
The bottom line
So those are three reasons you don't own shares of Yum! But all Foolishness aside, the company's performance in the recent quarter should give investors something to cheer about, and with the immense opportunity of China, you should seriously consider picking up shares.
True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.
Jim Royal, Ph.D., does not own shares of any of the companies mentioned. Best Buy and Wal-Mart are Motley Fool Inside Value choices. Chipotle is a Motley Fool Rule Breakers selection and a Motley Fool Hidden Gems pick. Best Buy, Coach, and Starbucks are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended buying calls on Best Buy and a bull call spread position on Yum! Brands. The Fool owns shares of Best Buy, Chipotle, Coach, Wal-Mart, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.