YUM Brands: How the “Beijing Boost” Will Ignite This Stock
By the Investment U Research Team
Thousands have witnessed the tremendous $40 billion in infrastructure improvements and beautification projects that China made for the Olympic games in the summer of 2008.
Athletes and tourists from around the world experienced the Chinese culture and dined on the unique local cuisine. But they’ve also been able to dine where most Americans eat on a daily basis.
And these restaurants aren’t in Beijing just for the Olympics.
Well before the Olympics arrived, there has been a gold rush for companies to stake their claim to China’s 1.3 billion consumers in the lucrative restaurant market.
We have identified one company that is perfectly positioned to corner this market well after the games have ended. This American company boasts 2,500-plus locations throughout China – four times as many locations as the next biggest competitor, McDonald’s, which has just 428 restaurants in China.
Over 1,700 restaurants – or nearly 70% of its China presence – are located in the cities that are hosting Olympic events.
And because the Olympics attracts audiences from several hundred countries, this company’s global brand recognition, with locations in more than 110 countries, is sure to pay off…
China’s Fast-Food “Gold Medalist” for 20 Years
We’re convinced, when it’s time for lunch or dinner, thousands, if not millions of visitors will be flocking to KFC or Pizza Hut. These two combined make up the largest casual dining chain in China.
And Yum! Brands (NYSE: YUM) owns and operates them all.
YUM will appeal to both sets of fans – foreign visitors and Chinese nationals – and easily take home the gold for fast-food business…
Foreign visitors will choose YUM because they have probably eaten there before and, at a minimum, will at least recognize the brand. The company has opened at least 1,000 new international locations for seven years running.
As for the Chinese visitors, who will represent 85% of the Olympic fan base, YUM’s rapid growth in China wouldn’t exist if Chinese consumers didn’t enjoy dining there.
And this isn’t just a case of a preference for American products. To appeal more to local communities, YUM wisely put local teams in charge. These teams are empowered to make critical decisions, including handpicking menu items that they know will sell.
| Why the Golden Arches Won’t Be Winning the “Gold” in China |
| The first restaurant company that would come to mind for a lot of people is McDonald’s.However, it has nowhere near the domination in China that it has in the United States.And while McDonald’s would be a worthy foe, its top priorities for the moment involve making its restaurants more upscale and taking business away from Starbucks. YUM, on the other hand, has been on the ground in China for more than 20 years. |
Plus, YUM has been in China for 20 years. This early entrance gave it the opportunity to expand without much competition and develop customer loyalty from a target audience that has since grown by leaps and bounds.
According to recent government studies, the Chinese middle class now has more than 250 million people – the equivalent of the entire U.S. population in 1990.
Rest assured, YUM is capitalizing on this booming middle class.
In 2007 alone, operating profits from its China division grew 30% to $375 million. It also opened a record 471 locations in the People’s Republic, up from 364 the previous year. And this strong growth has been going on for a while…
YUM’s grown China operations by an average of 25% over the last five years.
Even better, it’s unlikely to end anytime soon. Management estimates the country can support 20,000 locations.
And that means YUM has another 37 years of growth in the pipeline.
In the end, YUM’s prime locations surrounding the Olympic venues, clean restaurants and a lack of competition, all but guarantee the company will enjoy an earnings boost and strike gold as a result of the Olympics.
But this isn’t just a short-term opportunity…
Big Gains Beyond the Games
There are four reasons YUM is a compelling long-term investment…
- First, demand for fast food will likely increase if we enter (or discover we’re already in) a recession, as consumers adjust their dining habits and “trade down” to the value of fast food restaurants.
- Second, YUM is in the infancy of a turnaround plan for its domestic operations. While the U.S. market is saturated at roughly 20,000 locations, we can expect renewed growth as the company rolls out expanded operating hours and launches new menu items, including beverages and healthier fare.
You might recall McDonald’s implemented similar turnaround strategies not long ago. And it worked wonders for the company – and the stock. We expect similar results for YUM.
Third, YUM is expanding internationally at an impressive rate, and not just in China. On top of the 471 new China locations in 2007, the company added a record 852 restaurants in other markets.
All told, YUM checks in as the fastest-growing retailer in the world.
Last, and certainly not least, YUM sports superb fundamentals. The company has:
- Beat expectations for seven quarters and counting.
- Delivered on its promise of at least 10% annual earnings growth for six years in a row.
- Earned an almost unfathomable 70% return on equity (ROE).
What’s more, management plans to buy back up to $4 billion of the company’s stock in the next two years.
One last thing worth mentioning: YUM’s far-reaching operations insulate earnings from the negative impact of a falling dollar.
The more the buck drops, the more YUM realizes in foreign currency gains as it repatriates profits. That’s something most U.S. companies can’t brag about. Last year, it was enough to boost earnings by 6 cents per share, or $28 million.
At the moment, the stock is trading 17% off its 52-week high. But we believe these shares are ready to make a big move. And the Olympics, appear to be the perfect catalyst.
YUM! Brands is a current BUY at The Oxford Club, Investment U’s premium service.
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