A Less Complicated Play on China
For investors interested in international exposure, you might think that Yum! Brands, Inc. (NYSE:YUM) is better than McDonald’s as a way to play emerging market growth in developing economies like China. It’s true that Yum! derives over half of its total sales from China alone. Moreover, the company reported full-year earnings growth of 13% to $3.25 per share, excluding special items, and the company’s growth plans remain solidly intact, as the company opened a record 1,976 new international restaurants.
However, Yum!’s having some problems in China, to put it mildly. In December the company revealed that its KFC sales in China would suffer after the government announced it was investigating a chemical residue found in a small portion of its chicken supply.
Yum! CEO David Novak said on a conference call with analysts that the company will need time to restore its reputation with Chinese consumers. Yum! is refining and strengthening its food safety standards and plans to begin an aggressive marketing campaign to restore KFC’s brand image.
If you’d rather altogether avoid the headache presented by Yum!’s issues in China, you might be better served looking towards McDonald’s. McDonald’s has put huge efforts into developing its operations in China. McDonald’s is executing on its plan to open 225 to 250 new restaurants every year until it reaches its stated goal of 2,000 restaurants in China by the end of 2013.
Not only has McDonald’s charted a path to be dominant in China, but the company has now targeted growth through a different member nation of the BRIC countries: Russia. McDonald’s was the first international fast-food chain to tap the Russian market, and is now digging deeper into its foothold in the country. McDonald’s has 357 restaurants in more than 85 Russian cities, of which 46 were opened last year. In addition, the company plans to open at least 150 self-operated restaurants in Russia over the next three years.
A dominant business with a modest valuation
In January, McDonald’s reported great full-year 2012 results. Global comparable sales increased 3.1%, and consolidated revenues climbed 5% on a constant currency basis. Diluted earnings per share increased 5% as well on a constant currency basis to $5.36 per share.
At $95 per share, the stock trades for slightly more than 17 times its 2012 diluted earnings per share. Even better, McDonald’s is one of the most shareholder-friendly companies in existence. Last year, McDonald’s returned $5.5 billion to shareholders in the form of dividends and share buybacks. The company increased its dividend 10%, and will surely do so again in the fall.
McDonald’s isn’t a screaming value, but premium businesses command premium valuations. The company is one of the most successful and best-managed in the world. As Warren Buffett famously said, it’s far better to own a wonderful company at a fair price than a fair company at a wonderful price. I think that’s what we’ve got with McDonald’s. The company offers a 3.25% yield that trounces the yield on the broader market, and has a well-defined growth path ahead of it in international markets. McDonald’s should be on your watch list going forward.
The article Should this Stock be on Your Menu? originally appeared on Fool.com.
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