Yum! Brands (NYSE:YUM) is shaping up to be one of the best ways to invest in both China and the fast-food industry. Yum! is the parent of fast-food companies Taco Bell, KFC, and Pizza Hut. A couple of the company's key growth strategies includes focusing on growing its KFC brand in China and positioning Taco Bell to better compete with the likes of McDonald's (NYSE:MCD) and Burger King.
Has KFC shaken off its overhang in China?
Yum! Brands' first-quarter results showed that the company is rebounding nicely in China. Same-store sales in China were up 9% year-over-year, with KFC stores up 11%. As a result, system-wide sales in China were up 17%. China remains a key focus of the company, as it accounts for over 40% of company-wide operating profits.
For companies that have little room to grow in the States, international growth is often a viable option. Yum! Brands plans to open 700 Chinese restaurants and another 1,250 in other international markets in 2014. China will be a key part of the company's plan to grow earnings per share by 20% or more in 2014. Besides new restaurants in China, Yum! is also rolling out a new menu at KFCs in the country. Its new menu will include 15 new items and by tailoring its menu to consumers, KFC should be able to gain even more market share in the Chinese market.
How Yum! stacks up against the top fast-food chain
Yum! has finally expanded its reach by expanding Taco Bell's menu to offer breakfast items. It has a goal of taking away McDonald's breakfast market share, as McDonald's has been dominant there for some time. However, McDonald's is quick to point out its advantages, which include the fact that it has a kitchen layout optimized for breakfast. Despite the fact that its first-quarter comparable-store sales were negative, McDonald's is looking for April comparable-store sales to come in positive.
One question mark for McDonald's is that the company has too many menu items. This potentially slows down service times and increases order mistakes. Chipotle's simple menu is helping it win over more customers. As a result, McDonald's is looking to follow suit. It will rework its staffing in the U.S. and make its core items a bigger focus.
Core items that it plans to focus on include the Big Mac, french fries, and the Egg McMuffin, which make up nearly 40% of its sales. This new initiative for McDonald's comes as its sales have been weakening in the U.S. Comparable-store sales fell 1.7% for the first quarter, while Chipotle saw its comparable-store sales grow 13.4% during the same quarter.
An underrated player in the fast food space
Wendy's (NASDAQ:WEN) has been flying under-the-radar, but it's still been a great performer for investors. The shares are up over 45% over the past twelve months. Just last quarter (December-ended), Wendy's beat earnings estimates by over 20%. Its North American fourth-quarter comparable store sales were up 3.1%, which is well above the 0.2% decline that the company saw in the year-ago quarter. If this trend continues, Wendy's could easily take away more market share from its larger competitors.
Wendy's actually has a strong international presence. It has growth plans in Argentina and Japan and it already has agreements with franchisees in the Middle East, Africa, and Russia. However, Wendy's also wants to get presences in China and Brazil. Eventually tapping those opportunities will be the next major growth avenue for Wendy's.
How the shares stack up
The shares of Yum! Brands have yet to fully recover from the chicken scare at KFC locations in China. However, Yum! Brands still trades with an 18 P/E based on next year's earnings estimates. This is slightly above McDonald's P/E of 16 but still below Wendy's, which trades at a P/E of 21. It's also worth noting that Wendy's has the lowest debt-to-equity ratio of these three at 75% versus 127% for Yum! Brands and 88% for McDonald's.
Both McDonald's and Wendy's compete in the burger-focused part of the fast-food market. While Yum! Brands offers investors the unique opportunity to own three different brands, Taco Bell, Pizza Hut and KFC, it also has impressive exposure to the fast-growing Chinese economy. For investors looking to invest in the fast-food space, Yum! Brands is worth a closer look.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and 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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