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The Immortal Brand Is Here for Good: Yum! Brands, Inc. (YUM)

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With more than 38,000 restaurants in 120 countries, Yum! Brands, Inc. (NYSE:YUM) is the world’s biggest fast food company in terms of units. YUM owns the biggest brands in the world including KFC, Taco Bell, Pizza Hut, and WingStreet restaurants.

YUM’s 4Q12 Earnings

Recently, YUM announced its earnings for 4Q12. YUM reported earnings’ increase of 13% which is the 11th time it has exceeded its annual target of at least 10%. The company reported earnings per share of $0.83; analysts had predicted an EPS of $0.82. Revenues stood at $4.15 billion, slightly beating the estimates of $4.12 billion. Same store sales increased by 5%, margins grew by 4 points while operating income was up 13%. Income was up in all three major brands, with KFC and Taco Bell making significant profits.

United States

In the U.S, same store sales were up 3% while the sales growth and margins improved by 3%. In 4Q12, same store sales grew by 5% for Taco Bell whereas the margins were up by 2%. In the U.S, Taco Bell sold 325 million Doritos and Locos Tacos. Moreover, in case of Pizza Hut, 100 net new units were added in 4Q12 while Taco Bell was increased by 15 units.

YUM Restaurants International

In 2012, YUM opened more than 2000 stores outside the United States. During 4Q12, 473 new restaurants were opened which included 309 new units in the emerging markets. In Europe and Japan, same store sales remained flat while the rest of the YRI portfolio grew by 3%. The company did really well in Africa, Russia, and Thailand; while Pizza Hut had a great year in Korea, where its operating income grew by 15%.

Poultry Issues in China

As far as the international markets are concerned, China’s recent poultry issue still remained the center of attention for all investors. On December 18, Chinese Central Television (CCTV) aired a program which was linked to the KFC. It showed that some of the poultry farmers were using excessive levels of antibiotics in chicken. Unfortunately, some of this product was purchased by KFC China’s poultry suppliers. As a result, customers in China lost confidence in KFC and its same-store sales dropped by 6% in 4Q12.

Valuation

YUM is trading at a forward P/E (1yr) of 16.90x and has a PEG of 1.64. Incorporating a dividend yield of 2.20% in its PEG, we get to a PEGY of 1.38. We can value YUM by using an industry P/E of 22x. However, as the current poultry issues in China are still fresh on the minds of Chinese consumers, we would value YUM by using a discount of 15%. Hence, earnings multiple of 18.7x would be used.

According to the consensus estimates, YUM’s value comes out to be $70.31. Currently, YUM is trading at $63.51 in the market; hence, it still has an upside potential of almost 11%. Adding a dividend yield of 2.20% in this gives us a total return of 13%. In short, despite the recent issues in China, YUM remains a strong buy.

The Restaurant Industry

Just like YUM, its biggest rival, McDonald’s Corporation (NYSE:MCD) , didn’t have a flawless 2012. In the third quarter of 2012, sales at restaurants open at least a year fell 2.2% in the U.S. and Europe; while in Asia, Middle East and Africa, it fell by 2.4%. However, in the fourth quarter, it was up by a mere 0.1%. Despite the fact that the restaurant industry isn’t expected to do that well in 2013 amid economic downturn, McDonald’s is still hopeful that its renewed menus will drive significant amount of sales this year. With KFC facing severe criticism in China, McDonald’s has a great opportunity to grab a lion’s share in the fast food industry. You can have a further look at my analysis on McDonald’s here.

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