YUM bets on growth in China

The Big Three global fast-food chains are all of one mind when it comes to growth.

Yesterday,  we took a look at McDonald’s (NYSE:MCD) which ranks #1. Today, we look at Yum! Brands Inc., the second largest chain.  Yum (NYSE: YUM) owns Kentucky Fried Chicken, Taco Bell, and Pizza Hut and like McDonald’s has been cultivating an emerging market connection for decades.

Twenty-five years ago, I visited the Badaling section of the Great Wall of China. The country was opening its doors just a crack at that point,  so it was a surprise that a KFC was doing a land office business just outside the entrance.  On the same trip, I stopped by the world’s largest McDonald’s in Beijing.  A lineup snaked along the sidewalk waiting for a turn to sit on a bench for a photo with a plastic replica of Ronald McDonald.

YUM offers a slightly different opportunity than McDonald’s. Here’s a closer look:

Background: Yum Brands! Inc. is the second largest global fast-food chain by revenues, although it has more stores (48,000) in more countries (145) than McDonald’s. It is the holding company that owns Taco Bell, Kentucky Fried Chicken, and Pizza Hut.

Yum has 22% of all stores in China. In November 2016, the Chinese operations were spun off to Yum China (NYSE: YUMC) which pays a 3% royalty on revenues to the parent.

 Performance: Yum’s shares are up about 16% in the past year They hit a high of $119.72 in July on strong earnings. Menu refreshes and a delivery push drove better-than-expected growth at all of the restaurant operator’s chains. This includes Pizza Hut, which has struggled.

Financials: In its second quarter, global same-store sales grew 5% quarter-over-quarter, ahead of estimates of 3.1%.

 Recent developments: Yum has an ambitious expansion program and is opening an average of eight new stores a day in 2019. It is also firmly behind the franchise model with franchisees operating 98% of its stores. That lowers costs by transferring responsibility to owner-operators, who have the incentive to be lean and can also react more quickly to local tastes.

In May, Yum signed a master franchising agreement in India with New Delhi-based Burman Hospitality for its Taco Bell outlets. Burman wants to open 600 Indian Taco Bells over the next 10 years to make India the largest market for Yum’s Mexican food outside the U.S.

Yum China, meanwhile, will invest up to $525 million in the current year to open between 800 and 850 new stores. Most of them will be KFC outlets and a cafe chain called Coffii & Joy.

Yum bought a stake in the delivery service GrubHub Inc. (NYSE: GRUB) last year. GrubHub is based in Chicago and works with 115,000 restaurants in the United States to deliver food. Pizza Hut and KFC use GrubHub’s delivery at 300 U.S. locations, with plans to expand.

Like McDonald’s, Yum is investing in technology. In 2018, it bought online ordering software company QuikOrder. The software simplifies ordering and captures information about what, how and when customers are buying their food.

The company is testing non-meat fare including a meatless “sausage topping” for pizzas and may expand the roll-out of a vegan version of its chicken burger, which proved popular in the U.K. Yum already sells dairy and cheese-free Vegan pizzas in Europe and is testing fried chicken-like nuggets using a Beyond Meat product in Atlanta.

 Dividend: Yum increased its quarterly dividend by 16.7%, in the spring. The new annual rate of $1.68 yields 1.65%.

 Outlook: Yum has been opening units at a quick pace and the stock carries a p/e ratio of 28.11. That is the highest in the group, which means high expectations are built into the share price.

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This article appeared in the Nov. 4., 2019 edition of the Internet Wealth Builder newsletter.