Yum (still) On the Up and Up
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It seems that all reports of the demise of Yum! Brands (NYSE: YUM) have been greatly exaggerated. It was rumored that the Chinese would stop eating, and the Mayan doomsday would come as scheduled, and therefore impede Yum's growth plans forever.
Joking aside, Yum did announce slowing growth in China. Not only did they announce that it has slowed slightly, they also felt the need to adjust their outlook for the coming year. One statistic I thought noteworthy was the announcement of 700 new restaurants in 2013, compared to 800 in 2012.
Of course shares fell. As the stock price tumbled, it took about half of this year's gains with it.
And that's where we are right now. What do we do with this?
The Chinese Wildcard
So, is this the beginning of the end for the amazing growth story Yum has been? Yum's CEO David Novak would say no. In fact, he would sarcastically say no. “If the sky is falling in China, I promise, I will know about it before you–and I will let you know." Yum has faced the bears on Chinese growth before. People wondered how they would keep growing through the SARS scare and then also with Avian Flu. But each time Yum is presented with a Chinese challenge, they make it through to the other side.
Although it looks like their Chinese expansion is slowing, it's interesting to note a shift that is taking place in the way that they are expanding. Yum now wishes to shift their expansion focus away from the bigger cities, and into smaller cities. There are two reasons that this is significant.
First of all, Yum has focused almost entirely in the big cities up to this point in time. Granted, they still have room to grow there, but that is where the bulk of their locations presently are. In the big cities, they have about 9 restaurants per million people. But when you look at the smaller cities, they have about 2 restaurants per million people. That's a lot more room to grow.
But secondly, this is potentially a more profitable move for Yum. Why? Rent in places like Beijing and Shanghai is getting to be pretty pricey, but real estate is more affordable in smaller cities. So not only is there more room to grow in suburban areas, the growth is potentially more profitable. The recent sell-off was due to pessimism of just 700 new restaurants compared to 800. But if this issue of real estate prices holds true, you have to ask yourself if Yum will be able to achieve higher profits on fewer stores.
But Even Still
But even if Yum is starting to slow in its growth, does this justify the recent sell-off?
It has been outpacing the majority of its competitors in revenue growth over the last five years. It's not fun to see slowing growth, but even if it slows a tad, it still is growing faster than its primary nemeses.
Back several months ago, I was very bearish on Chipotle Mexican Grill over the short-term. In my opinion the P/E ratio was way to high. Chipotle was growing very fast, but I couldn't help but think that the first whiff of slowing growth would knock them off their 60 P/E ratio pedestal. And that's what happened.
But Yum is a different situation. They don't sport the ridiculous P/E.
- Yum! Brands 19.68
- McDonald's (NYSE: MCD) 16.59
- Domino's (NYSE: DPZ) 23.17
- AFC Enterprises (NASDAQ: AFCE) 22.90
As you can see, when compared to competitors, there is nothing outrageous with Yum's valuation.
I wind up saying this a lot, but I think that the market has given us buy-and-holders a great entry point to this stock. I was really convinced that we weren't going to see this stock in the mid-60's ever again. As fate would have it, we can now jump in with both feet. This company is the real deal for the long haul.
thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!