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A Yum! Feast for the Chinese

By Tim Beyers – Updated Nov 16, 2016 at 4:27PM

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Tacos, pizza, and the colonel's secret recipe tantalize taste buds in China.

I like my fast food spicy. Often, that makes me a sucker for Yum! Brands' (NYSE:YUM) Taco Bell. Apparently I'm not the only one. The taste for tacos, Pizza Hut pizza, and the colonel's secret recipe fried chicken at KFC is stretching beyond borders, all the way to China. And that's fattening the bottom line at Yum!

In providing a buffet of guidance for this morning in preparation for its annual investor meeting next week, the fast-food conglomerate reported that its earnings per share before special items would be up 14% this year, and 10% in 2005. The key, according to a company statement, is dramatic growth in China, which will partially offset bland U.S. sales and allow Yum! to meet its guidance of $0.72 in per-share income for 2004.

But the 2005 guidance is more interesting. For instance, the company will begin the New Year by breaking out the results of its China-based operations separately. No doubt this is because of the expected gains in the region. Management says worldwide system sales growth will 5% to 6%, with 1% of that coming from an extra week in the fiscal year. Not surprisingly, the fastest-growing unit is again expected to be China, at a mouthwatering 22%.

How much of the growth will come through new-store openings isn't entirely clear from the press release, but it's worth noting that 26% of Yum!'s planned openings will be in China, and 76% will be overseas. Clearly, exporting junk food is profitable.

Does this mean Yum! is any more palatable as an investment than peers McDonald's (NYSE:MCD), Sonic (NASDAQ:SONC), CKE Restaurants (NYSE:CKR), or Wendy's (NYSE:WEN)? Maybe, but it's not as if Yum! is the only one who's figured out there's big money to be made overseas. McDonald's, for instance, has been planting roots around the globe for years. (Cult movie fans might even remember John Travolta describing how Mickey D's signature Quarter-Pounder is depicted in France.)

Besides, KFC sales have deteriorated as Taco Bell and Pizza Hut sales have grown. And even if the Chinese like their tacos as spicy as their kung pao chicken, Yum!'s stock, trading at a heady 40 times free cash flow, is priced for a nasty case of heartburn.

Feeling hungry? Try these tasty bits of Foolishness:

  • Fellow Fool Seth Jayson wonders whether Yum!, McDonald's, and others might offer up investors a value meal.
  • Much as I love Taco Bell, P.F. Chang's China Bistro (NASDAQ:PFCB) treats my taste buds, and my wallet, right.
  • Maybe KFC is hurting because of higher chicken prices. It sure gave Motley Fool Hidden Gems pick Buffalo Wild Wings (NASDAQ:BLWD) a bit of indigestion in its most recent quarter.

Whatever your appetite, delicious returns for your portfolio are on the menu when you subscribe to any of our investing newsletters. A free trial is yours for the asking.

Fool contributor Tim Beyers owns shares of Buffalo Wild Wings. You can view his Fool profile and other stock holdings here.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$245.95 (-0.80%) $-1.99
The Wendy's Company Stock Quote
The Wendy's Company
WEN
$19.07 (-0.37%) $0.07
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$110.65 (-0.13%) $0.14
Sonic Corp. Stock Quote
Sonic Corp.
SONC

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