China impact
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.
Chipotle Mexican Grill, Inc. (NYSE:CMG) doesn’t offer any yield, and it’s trading at 39 times earnings. Therefore, the risk/reward ratio isn’t ideal. That said, Sterne Agee recently initiated coverage with a Buy rating, and it set a $429 price target on Chipotle, citing the likelihood for increased market share gains in coming quarters.
It should be noted that the shorts are all over this stock, likely anticipating that the company’s expectations have exceeded its actual growth potential. The good news for longs is that Chipotle Mexican Grill, Inc. (NYSE:CMG) maintains a pristine balance sheet, which should help limit any downside potential. If things go south, Chipotle has the capability of returning capital to shareholders, which would attract more investors.
Conclusion
All three of the aforementioned companies offer intriguing investment opportunities. However, Chipotle Mexican Grill, Inc. (NYSE:CMG) looks to be the least intriguing of the three due to its valuation and current lack of yield. If the stock doesn’t perform well, then you at least want to receive some dividend payments to help ease the pain. On the other hand, a lack of dividend payments has helped Chipotle maintain an excellent balance sheet and focus on growth.
Yum! Brands, Inc. (NYSE:YUM) is growing, but there has been a lot of drama surrounding the company as of late. The company’s debt-to-equity ratio of 1.2 is also higher than the industry average of 0.7. Highly-leveraged companies are less likely to return more capital to shareholders, and they don’t hold up as well in difficult market environments.
McDonald’s Corporation (NYSE:MCD) offers fair valuation at 19 times earnings, its margins are above average, it offers a 3.2% yield, debt management has been strong, and it’s one of the strongest brand names in the world. Furthermore, its size and diversification make it very resilient in bear markets.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, Inc. (NYSE:CMG) and McDonald’s Corporation (NYSE:MCD). The Motley Fool owns shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) and McDonald’s.
The article A Better Investment Than Yum! Brands? originally appeared on Fool.com.
Dan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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