McDonald’s Corporation (MCD), Yum! Brands, Inc. (YUM): Bite It or Spit It?

There is no doubt that the company has seen significant growth from 2008, and I don’t see a reason why this won’t happen in the coming years. McDonald’s is known for changing its menu, time and time again, and even if Yum! doesn’t bring anything new to the table, it will still see an overall growth. Yum’s brand name is huge, and its restaurants are rather sticky.

Africa and Russia are seen as two potential countries for growth, and the company will be opening more restaurants shortly. Africa’s massive population could boost future revenue, and expanding further in the European continent is seen as another potential growth driver.

U.S is one of the biggest markets for Yum! Brands, Inc. (NYSE:YUM), and even though it won’t be opening numerous restaurants in 2013, the company is set to increase its revenue by the end of the year. Introducing new products at Taco Bell and Pizza Hut could help the company maintain its current market position as both the brands have potential.

In terms of getting a return on your investment, Yum! has a good reputation in dividend payouts, and the company has been increasing its dividend payout for 8 consecutive years. Yum! recently declared a dividend per share of $0.335, which is due sometime in May. Even though McDonald’s has a higher dividend yield at 3%, we all know that higher dividends are not always a good thing, especially if you’re looking for a long-term capital gains.

Yum! Brands, Inc.: The bad

Possibly, one of the biggest reasons why some investors are not sure if Yum! is a good investment is that the company’s growth relies heavily on China. Almost half of its revenue comes from the Chinese market, and even though the company has plans going forward in the country, it can sometimes be scary on how much it relies on China. Even though last year’s chicken incident is behind the company, a couple more of these incidents and the company might lose its Chinese share further.

Pizza Hut is considered as another factor, mainly because the brand faces a lot of competition from other chains like Domino’s. Pizza Hut is pretty much the same as it used to be 10 years ago, and I don’t know how it still exists. Domino’s, Papa John’s, and other Pizza chains continue to expand, and 2013 might be the year which will see a steady decline in Pizza Hut’s revenue.

Even though Domino’s is behind Pizza Hut in terms of total outlets in the U.S, the latter has lost some of its brand image in recent years. The reason why Domino’s Pizza’s sales have jumped in recent years is its new recipes. The company has been constantly reinventing recipes and has been trying out new things, which is what consumers like.

J. Patrick Doyle, Domino’s CEO, recently stated that the menu reinventing process during the last 2 years has been crucial for boosting sales. Also, Domino’s has been witnessing a lot of sales growth because of its online ordering service.

Even though Pizza Hut is a big brand and it enjoys loyal customers, I think it will continue to decline this year. Pizza Hut has seen several years of declining sales, and it will need to do something soon in order to save the brand name. Restructuring and redeveloping the brand are possibilities if the company wants to go back on top as the leading Pizza chain.

Lastly, Yum! Brands does look overvalued, mainly because of the company’s recent performance and its low profit margin, compared to competitors. Previously, Yum!’s management was quite bullish on the company’s future growth, especially in China. However, slow growth in China indicates that the company might be overvalued.

Conclusion

Yum! remains a very interesting stock for investors looking for a long-term investment opportunity. The company might look like its overvalued because of its recent decline in the Chinese market; however, there are numerous growth opportunities in China. The CEO is quite confident that the company will be able to expand quickly in China, with the company looking to leave the chicken supply incident behind it.

Yum!’s growth depends on China, and if the company is able to launch several new restaurants in the country, with an increasing revenue, then Yum!’s share price will definitely go up. It will take some time for Yum! to capitalize on the Chinese and African segments, however, when the company is successful at doing so, investors will definitely enjoy capital gains.

The article Yum! Brands: Bite It or Spit It? originally appeared on Fool.com and is written by Yasir Idrees.

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