The past year has been ho-hum for Yum! Brands, Inc. (NYSE:YUM)‘ investors. We’ll take a look at why the stock hasn’t performed as well as its peers so far this year, the potential for the company, and whether or not one of its peers is likely to present a better long-term investment opportunity.
The Chinese economy might not be as strong as advertised, but there is no denying that China has an enormous population — over 1.3 billion people. Therefore, it’s a great place to set up shop, which Yum! Brands, Inc. (NYSE:YUM) has done. Yum! Brands even has its own China division, logically titled Yum! Restaurants China.
Many Americans who invest in global companies think China is icing on the cake. In some cases, that might be true, but not for Yum! Brands as nearly half of its sales come from China.
In the fourth quarter of 2012, Yum! Brands, Inc. (NYSE:YUM) had to deal with the accusation that KFC used low-quality chicken. This, of course, led to a decline in sales. After that storm began to pass, a new one rolled in, and it went by the name of avian flu, which once again led to a decline in sales.
As a result of these two negative events, comps fell. Most recently, KFC comps in China declined 25% in May. At least this was an improvement over April, which saw a 29% comps-drop. It should also be noted that Pizza Hut China comps increased 12% — higher than the 5% increase in April.
In an attempt to rectify the KFC issue, Yum! Brands, Inc. (NYSE:YUM) committed a lot of capital to marketing and promotions. These steps needed to be taken to get people back into its KFC restaurants. This seems to have had a positive impact, but the costs will continue to be felt for a while, which could negatively impact earnings.
Yum! Brands, Inc. (NYSE:YUM) should be able to eventually reestablish itself in China. Overall, Yum! Brands owns 39,000 restaurants in 125 countries, including India. India needed to be mentioned due to its massive population of 1.2 billion people. Yum! Brands also has its own India division, titled Yum! Restaurants India.
Now look at how Yum! Brands, Inc. (NYSE:YUM) has opened a KFC in Ulaanbaatar, Mongolia. Reading about Mongolia might not generate much excitement, but Mongolia is one of the fastest-growing economies in the world, and Ulaanbaatar is its capital. It’s clearly evident that Yum! Brands, Inc. (NYSE:YUM) plays the location-game well.
Yum! Brands vs. peers
McDonald’s Corporation (NYSE:MCD) is a constant threat to Yum! Brands, Inc. (NYSE:YUM). Put simply, those who choose to dine at KFC, Pizza Hut, or Taco Bell are also likely to dine at McDonald’s. It comes down to which company can better draw the undecided consumer with its menu options, value deals, promotions, and atmosphere.
McDonald’s Corporation (NYSE:MCD) is a branding and marketing Jedi, which has led to extraordinary long-term success. Yum! Brands isn’t nearly as large as McDonald’s, but it would like to be someday. However, McDonald’s Corporation (NYSE:MCD) is continuing to grow around the world, and dividend investors prefer its 3.2% yield over the 1.9% yield that Yum! Brands offers.