Yum! Brands, Inc. (NYSE:YUM) may have convinced Chinese diners to come back. After a chicken contamination scandal hit Chinese KFC restaurants hard last quarter Yum! warned that this problem could weigh on the company’s results for the entire year. Now, Yum! looks like it might recover from this scandal sooner. And KFC isn’t the only thing Yum!’s cooking up. Taco Bell has shaken up its menu, adding a new taco shell flavor and special afternoon offerings that could help drive traffic.
China
Yum! just released an 8-K that reported its restaurants’ February same store sales in China. KFC’s sales stayed the same, which was actually good news for investors worried about the chicken controversy. Yum! Brands, Inc. (NYSE:YUM)’s restaurant portfolio also paid off in February, because Pizza Hut attracted more Chinese diners even with the scandal hanging over KFC. Pizza Hut reported a 13% sales gain, helping Yum! overall rack up a 2% same store sales gain for the month in China. After the announcement came out, Yum! shares rose 6.3% higher after hours on March 11. China’s got Yum! investors’ attention right now, but the chain’s also got plans in the United States.
Doritos Tacos
Taco Bell built on the success of its earlier Doritos tacos launch by rolling out Cool Ranch tacos. The fast food chain explained that its March 7 Cool Ranch launch topped off a successful social media marketing campaign. The Cool Ranch tacos help Taco Bell attract visitors by capitalizing on a popular PepsiCo, Inc. (NYSE:PEP) brand, so this product could actually help both companies. Taco Bell and Pepsi already work together to some extent, because Taco Bell serves Pepsi soft drinks at its restaurants. This successful partnership could lead to more crossover products, such as Pepsi snacks drawing from Taco Bell menu flavors.
Pepsi’s also a solid blue chip with expansion plans for China. The food and drink giant has developed a social media strategy that promotes Tropicana and Lay’s in China along with its cola drinks. The soft drink maker currently offers a 2.8% forward yield that surpasses Yum! Brands, Inc. (NYSE:YUM)’s yield of 1.9%, although Pepsi’s payout ratio of 54% also exceeds Yum!’s payout ratio of 35%. With $6.8 billion in free cash flow, Pepsi’s higher payout ratio isn’t a problem though. Pepsi’s forward P/E of 16 also comes out lower than Yum!’s figure of 18.
Happy Hour
Taco Bell also wants to attract diners in the late afternoon. Restaurants and bars both often have dead time after the lunch rush, and one of the traditional solutions involves discounted drinks. Taco Bell doesn’t serve alcohol, but the chain still recognizes the popularity of the happy hour concept. Taco Bell’s Happier Hour page lists its afternoon specials, including blended ice drinks and three grillers, which the restaurant offers for a dollar each. These items seem similar to popular convenience store snacks, so Taco Bell might not be primarily competing with other quick service restaurants here. If Taco Bell does plan to go after convenience stores, its drive through lane could provide an advantage.
Sonic Corporation (NASDAQ:SONC) already attracts diners in the afternoon with drink discounts. Sonic lets diners pick out any drink it can make for half price, and the burger chain states that it can mix up 398,929 different drink combinations. Sonic reported 11.5% higher earnings last quarter, which suggests effective price management. In early 2013, Sonic expanded its happy hour selection by offering deals on a few snacks as well. Sonic Corporation (NASDAQ:SONC)’s move suggests that Taco Bell made a good marketing decision.
Sonic lacks the international reach that both Yum! Brands, Inc. (NYSE:YUM) and Pepsi have, but the burger chain could still be worth consideration. Sonic has a forward P/E of 15 and a PEG of 1.10. Yum! has limited room to grow domestically, which is why the chain has moved into China, while Sonic still hasn’t expanded throughout the entire United States yet. Sonic Corporation (NASDAQ:SONC) does lack a dividend, and its 6.8% profit margin doesn’t look very impressive compared to Yum!’s 11.7% figure.
Business Environment
The KFC chicken scandal might have hurt McDonald’s Corporation (NYSE:MCD) as well, although the drag here might also be temporary. McDonald’s announced that its Asia Pacific, Middle East, and Africa division reported 9.5% weaker comparable sales in January, and the restaurant mentioned that the chicken supply chain controversy had affected its restaurants in China. In February, McDonald’s announced 1.6% weaker comparable sales for the APMEA division. McDonald’s Corporation (NYSE:MCD) did explain that it had weaker sales in January and stronger sales in February because of the timing of the Chinese New Year, and the leap year in 2012 made the February same store sales comparison tougher. Nevertheless, McDonald’s pointed out chicken as an issue in January, but not in February, which may mean that the scandal has died down in general.
McDonald’s offers a forward yield of 3.1% that also surpasses Yum! Brands, Inc. (NYSE:YUM)’s figures. Like Pepsi, McDonald’s offers a 54% payout ratio, as both the soft drink maker and the burger chain are mature businesses. McDonald’s Corporation (NYSE:MCD) boasts a 19.8% profit margin and a forward P/E of 16 that also look good in comparison with Yum!.
Takeaway
Yum!’s surprising results in China provide the main explanation for this restaurant company’s current price. KFC’s rapid recovery suggests that the previous earnings expectations for 2013 were too low. Nevertheless, other large food companies offer bigger dividends, so growth matters for Yum! Taco Bell menu upgrades in the United States could provide this growth, as the restaurant could both bring in diners at off peak hours with its drink specials and sell more Doritos tacos during peak hours. With KFC posting better results in China, and Taco Bell preparing to post better results in the United States, Yum! Brands, Inc. (NYSE:YUM) looks like it could be worth its premium right now.
The article Multiple Brands Definitely Help Yum! Right Now originally appeared on Fool.com and is written by Eric Novinson.
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