Yum! Brands is Where Burger King Wants to be in China
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the irresponsible monetary policy of Federal Reserve Chairman Ben Bernanke, the shift of economic power to China from the United States has been overlooked. At present, China has about $3 trillion in foreign reserves. The Federal Reserve Bank of the United States has about $3 trillion in assets, too. There is a major difference: China earned its foreign reserves by exporting more than it imports while the Federal Reserve acquired its $3 trillion in assets through an accounting mechanism of expanding its balance sheet to buy the Treasury Bonds that no other investor would at such low interest rates.
That is one of the many reasons why the economic outlook for China is so much more positive than that of the United States or Europe. Economic growth in the United States is anemic and Europe is in a recession despite trillions in stimulus spending by the central banks. For the second quarter of 2012, China just registered a 7.6 percent growth rate for its gross domestic product. Its trade surplus for the month of June was over $30 billion.
For those and many other reasons, companies such as Yum! Brand (NYSE: YUM), Caterpillar (NYSE: CAT) and Apple (NASDAQ: AAPL) have focused on the market in China as its future. Yum! Brands, which owns and operates KFCs and Pizza Huts, books about $200,000 in profits per stores in China as opposed to only $30,000 from the US facilities. In its most recent earnings report, revenue from China increased for Yum! Brands by over $700M for the period from the previous year.
Like Yum! Brands, Apple too makes more from its stores in China. For Apple, its five stores in China are the most profitable. Revenue from China this year is projected to more than double for Apple to $20 billion. As with Apple, Caterpillar too has a deep presence in China that is also expanding. The Big Cat has 16 manufacturing facilities in The People's Republic with nine more under construction. The number of employees of Caterpillar in China is expected to double by 2015.
Burger King Worldwide (NYSE: BKW) and Denny's (NASDAQ: DENN) are opening operations in China in hopes of duplicating the success of Yum! Brands. Burger King Worldwide recently announced plans to open 1,000 new restaurants in China. For Denny's, there will be an initial 50 new restaurants to start in the People's Republic.
Yum! Brands has also accelerated its expansion in China, putting it on course to open a record number of new restaurants in 2012. During the second quarter, 160 new units were opened with plans for at least 700 more store openings this year. That is an increase from the previously planned 600. In addition to opening more restaurant, Yum! Brands has increased the number of 24-hour operations and enhanced the delivery services at more KFC stores in the People's Republic. Of the KFCs in China, nearly all offer breakfast now with about half making deliveries. About half the KFCs are also 24 hour operations. As one commentator wrote about this expansion in the People's Republic for the fast food giant, "After visiting China earlier this month I figured out the local folks are simply addicted to the brand - therefore buy as much YUM stock as you can. The main market is not the US, but China!"
While there has been a slowdown in economic growth for China, the country still has the highest savings rate in the world with consumer spending increasing by one-third over the last five years, a unique combination. This has been very good for Yum! Brands. Over the past year of market action, the stock price has risen by 26.62%. The profit margin is 11.58%, buffeted obviously by the better performing units in the People's Republic. Now trading around $65 a share, the mean analyst target price for Yum! Brands over the next year is $76.95.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple, Burger King Worldwide, and Yum! Brands. 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.If you have questions about this post or the Fool’s blog network, click here for information.