Stock of the Week
NYSE Symbol: YUM
Industry: Fast Food Restaurants
Price as of 2/4: $49.30
January is over. It wasn't spectacular month , but a 2.7% rally for the Dow was the best January since 1997. That just shows you how bad the last 13 years have been. The Dow was up every day this week. I wish it was that easy all the time. The earnings keep coming in better than expected. The companies within the S&P 500 will post record profits this year, but unfortunately hiring has still lagged. For a second straight month, the unemployment number came in worse than expected. A number of recently featured stocks are breaking out to new highs like Corning, GE, Exxon Mobil, Alcoa, Hartford, IBM, and Chevron. A number of financials have pulled back following earnings, but the long term fundamentals remain on track. The same could be said of Ford which saw heavy selling in the last two weeks. The recent strength in the markets is not only due to improving fundamentals in the U.S., but continued expansion overseas. The constant expansion in China has helped a plethora of U.S. companies including this week's featured stock. The stock of the week is Yum Brands. If anyone is looking for a China play, Yum Brand is a good one. The conglomerate owner of Pizza Hut, Taco Bell, and KFC is planning on spinning off their Long John Silver's and A&W All-American Restaurants to accelerate expansion overseas in particular, China. Currently Yum Brands gets a third of their sales from China, but has major plans for further expansion. The stock has been lagging the broader market recently due to accusations of not using enough meat in their Taco Bell tacos. However, better than expected earnings on Thursday has put the stock back in rally mode. Yum Brands is not a cheap or conservative investment, but investors looking for a restaurant stock looking to expand overseas, in particular in China, would be hard pressed to find a better stock than Yum Brands.
In the fourth quarter, Yum Brands earned $274 million, or 56 cents a share, up from $216 million, or 45 cents a share, in the same quarter of 2009. Excluding special items, the company would have earned 63 cents a share, up from 50 cents, beating estimates by 3 cents. Total revenue came in at $3.56 billion, up from $3.36 billion, beating estimates of $3.51 billion. Same-store sales, or those at outlets open at least a year, grew 8% in China, 5% in the U.S. and 1% in its international division. Worldwide restaurant margins increased one percentage point. In the U.S., same-store sales were mixed, up 8% at Pizza Hut and 2% at Taco Bell, but fell 4% at KFC. For the full year, the company reported net income of nearly $1.16 billion, or $2.38 per share, compared with $1.07 billion, or $2.22 per share, in 2009. Its revenue was $11.34 billion, up from $10.84 billion in 2009. Analysts were expecting earnings of $2.82 per share on revenue of $11.82 billion for the full year. Looking ahead, Chief Executive David Novak noted the company expects to face commodity inflation and a global economy that is still recovering. Yum Brands still expects double-digit earnings per share growth in 2011. In 2010, Yum Brands opened 1,391 restaurants, 507 in China and 884 across the rest of Yum's international businesses. Yum now operates 10,000 stores in emerging markets worldwide. And the Chinese business is on its' way to generating a billion dollars in operating profits for Yum Brands.
Looking at the valuation for Yum Brands, the stock is not overly cheap based on our traditional parameters which is why Yum is not a conservative investment. Currently the stock trades for 17 times earnings, 2 times sales, and provides a modest dividend with a yield of 2%. That's not an overly cheap stock, but a popular stock among fund managers looking for exposure to the rapidly expanding Chinese economy.