Yum! Brands, Inc. (YUM) Is Looking Tasty

Yum! Brands, Inc. (NYSE:YUM), the owner of the ubiquitous brands Taco Bell, KFC, and Pizza Hut, issued positive results from its second quarter, showing strong free cash flow and an even stronger trend in improving same store sales. Over this past quarter, Yum! Brands, Inc. (NYSE:YUM) has been fighting off a scandal about tainted chicken in China and a saturated fast-food market in the U.S. But as this company has shown, bumps in the road lead to entry points for investors.

Pizza Hut delivers

An outbreak of avian flu in some Chinese cities left KFC with little reason to offer higher same store sales for the second quarter. Customers were reeling from this outbreak, and tended to stay away. While the scare translated into lackluster performance in China by KFC, Pizza Hut championed a strong quarter, offsetting KFC’s losses by attracting 7% more sales.

Yum! Brands, Inc. (NYSE:YUM)’s management stated on the conference call that these “isolated incidents” will not dictate the growth of the restaurants in China. The Chinese market is important to Yum! Brands, Inc. (NYSE:YUM), as it accounts for more than half of the company’s revenues. With the avian flu scare behind it, Yum! Brands, Inc. (NYSE:YUM) should be able to improve its revenues from that region.

The U.S. palate is munching tacos and fried chicken

Sales in the United States grew by only 1% compared to 7% in the prior year. The lackluster performance for Pizza Hut in this region (2% decline in sales) was buttressed by sales growth at Taco Bell and KFC by 2% and 3%, respectively.

The industry growth rate, including the U.S. sales growth rate of competitors McDonald’s Corporation (NYSE:MCD) and Burger King Holdings, Inc. (NYSE:BKC), is approximately 1%. This percentage increase matching that of Yum! Brands, Inc. (NYSE:YUM) alludes to the fact that the fast-food market in the U.S. may have become more saturated with something other than just fat: competition.

That being said, Yum! Brands spreads investor’s risk across a global franchise model, which has amounted to steady revenue streams and positive free cash flow.

Valuation

Yum! has earned over $13 billion in revenue for the 12 months ending June 15. Analysts estimate the company’s top line for fiscal year 2013 will offer investors $3.09 EPS, which is a 4.94% increase year-over-year. As of its July 25 closing price, Yum! traded at 23.79 times EPS.

Over the next two fiscal years, analysts expect revenue to grow to $16.9 billion, with an EBITDA margin of 21.9%, resulting in $4.43 EPS in 2015. These numbers seem very attainable by Yum! as its management has suggested growth in China and steady growth in the U.S. will lead this company, and stock, forward. A price target of $106 isn’t out of the question, taking into account the current trading multiple and future earnings potential of $4.43 per share.