Yum! Looks Delicious
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As China’s population becomes more urbanized over the next decade, Yum forecasts the number of consumers to more than double. As such the company is looking to China for growth opportunities as the US and Europe continue to languish. While US sales across all Yum! Brands (NYSE: YUM) grew a paltry 1%, China sales grew by 19%.
Yum’s China business currently accounts for over 40% of operating revenue, and the company expects that to grow another 10% per year all the way through 2020. Over the next ten years the China market is expected to grow to roughly 600 million consumers, almost twice the size of the total population of the United States.
Success in China, as has been documented previously, for KFC has come from their willingness to fully embrace a local supply chain at all levels of their business but retain corporate control of 90% of its stores rather than franchise them. What has worked in the U.S. for McDonald’s (NYSE: MCD) and other QSRs has not worked in China and it is part of the reason why McDonald’s has struggled there.
The company has more than 4,600 locations in China with more than 700 more due to come online in 2012, even as the company deals with higher worker and operation costs due to both rising domestic inflation and a slight devaluation of the Yuan. Second quarter profits fell short of estimates, rising just 4.7%. Despite this decline in the growth of its China business the company remains positive on the outlook for China and is looking to grow market share. Yum currently has 40% of the fast food market in China and employs over 250,000 people. McDonald’s claims just 16% of the Chinese market with sales increasing just 1% for the EMEA region in their most recent quarter.
Yum also has very aggressive plans in Asia’s other behemoth, India, where it plans to increase its stores to 1,100 by 2015 from the current 305. India’s religious aversion to beef as well as the lack of any viable competitors in the country mean KFC is well-positioned to fill a real void in the Indian restaurant market. Look for KFC and Pizza Hut to replicate their Chinese strategy in India with corporate being very adaptable to regional tastes within the country as they expand.
More KFCs are planned for Southeast Asia as well, especially in Vietnam where the company plans to double the number of stores by 2015 when the ASEAN union comes online. Lack of serious competition makes KFC a favorite choice, but that may soon change as other fast food operators enter the field in coming years, but for now KFC is actively acquiring market share and building the brand. Burger King is effectively punting in the region, looking to enter the markets via airports to appeal to foreign travelers while not having to maintain larger installations outside of the captive bubble that is a modern airport.
As opposed to the US and Europe, western fast-food brands in Asia are perceived as a premium product amongst the region’s new middle class, and it is KFC that has been a pioneer in this branding process.
Yum currently trades at a multiple near 20 and with the markets beginning to heavily discount future growth as the reality of a protracted period of malaise settles in for the medium term it would not surprise for that margin to compress over the next few quarters. Yum is currently forecasting that profits will increase 12% in 2012 to $3.22 a share and at a multiple of 20 the stock is currently fully-priced, with a 1.8% dividend. With the U.S. Dollar continuing to push higher against the Yuan this will also put a dent in Yum’s bottom-line as currency effects shaved $0.07 per share off of McDonald’s earnings.
While the latest earning report showed great current business and a solid track record and plan, the realities in terms of rising input costs, global uncertainty and a market rewarding past performance on this side of richly, it’s easy to expect Yum to outperform, but the question will be against what kind of market, rising, flat or negative. Invest based on your outlook and whether cash would be better for you.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's 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.