Yummy Present Tasty Future

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Yum! Brands (NYSE: YUM) had recently reported its third quarter earnings and has performed well, almost matching the analysts’ expectations. Restaurant margins worldwide have improved by 1.9% but growth in US margins by 4.6% helped the company’s performance. The quick service restaurant known for its concept of Pizza Hut and KFC is looking forward to deliver earnings as tasty as their food.


What’s Going to Yum You Up

Net profits for Yum have soared by 23% to $471 million and revenues have risen by 9% to $3.57 billion for the quarter on a last year’s comparative basis. Same store sales have increased across China and the US by 6.0% and 2.0%, respectively for Yum Restaurant International (YRI). The increase in same store sales business of YRI has been off-set by the divestiture of LJS and A&W, and the timing of the Ramadan. Apart from the same store sales increase, 192 new restaurants in China and strong growth, supply chain efficiency and less discounting in the US boosted margins. China’s decent rebound, lined with prospective investments coupled with a $100 million investment in the growing and less saturated Indian market, to double the store count by 2015, should please investors.

The Concerns Around

Yum has almost over-delivered every time but two things at present that concern me about Yum are the slow growing economy and mismatch in growth of operating cash flow by 6.75% to an increase in net profit by 19%. Investor’s expectation is also a cause of concern for the management of the company

McDonald's (NYSE: MCD), one of the largest competitors of Yum, is focusing on discount deals in many European regions to boost revenues. In Germany its offering a "McDeal” consisting of fries, burger or chicken sandwich for €3.79, along with a "buy one, get one free" coupon for McNuggets. "Eurosaver" menu, containing options like a €2 sandwich has been introduced in over 1200 units in France. These deals should increase sales but will hit profits too. McDonald’s has recently started testing M TV channel, if successful will open an entirely new stream of revenue for it.

Starbucks (NASDAQ: SBUX), purchase of La Boulange should improve its operations, by expanding its bakery section and improve customer base by offering hot sandwiches and other options. This current practice can help Starbucks to enter in the growing restaurant segment. The company also has revenue and cash flow growth exceeding industry standard and has improved its return on equity slightly over the last few quarters. Low debt-equity ratio implies successful debt management. Strong balance sheet and diversified growth prospects can affect Yum and its growth initiative.


What Yum Holds in Present

In my opinion Yum offers a very good long term investment opportunity with its diverse operations and growth prospects in many regions. The Company has paid decent dividend, though a bit lower than others in the industry. Reasonable debt level, strong revenue growth and balance sheet with decent cash flow from operations strengthens the Company’s image in the eyes of investors.

tarunbachhawat has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Chipotle Mexican Grill, McDonald's, and Starbucks. 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.

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