Yum! Brands, Inc. (NYSE:YUM) is possibly the largest restaurant company with over 39,000 outlets all around the world. Yum!’s three major restaurants include Pizza Hut, Taco Bell, and KFC. The company has several major divisions, including its U.S headquarters, Yum! China, Yum! India, and its international restaurants division.
Yum! Brands, Inc. (NYSE:YUM) is definitely a huge brand, which is why it has been making headlines. China is considered as Yum!’s biggest market, and most of its revenue comes from the Chinese division. After a recent chicken safety controversy, Yum! has received a lot of criticism about its chicken supply in China. The company has been looking shaky after the incident, as it saw a 20% sales decline in January from the Chinese market.
McDonald’s Corporation (NYSE:MCD) is probably Yum!’s biggest competitor, with over 33 million restaurants all over the world. Even though McDonald’s Corporation (NYSE:MCD) is a single brand, the company is still one of the most popular chains around the world.
Domino’s Pizza, Inc. (NYSE:DPZ) is another big competitor as the restaurant chain has over 10,000 outlets around the world. Domino’s might not be a direct competitor to Yum!; however, the company is a direct competitor to Pizza Hut, which is one of the biggest divisions under Yum!.
Valuation
With a market cap of nearly $31.5 billion, Yum! Brands, Inc. (NYSE:YUM) is currently trading between $68 to $71. After reaching the $74 mark last year, Yum fell to $62 in February, with one of the reasons being its recent controversy in the Chinese market. Since then, the company has been growing, and many observers believe that the China chicken scare is now behind the company.
McDonald’s Corporation (NYSE:MCD), on the other hand, has a market cap of around $99.5 billion and is currently trading between $98 to $100. The company fell from $94 to $84 in November last year; however, since then, McDonald’s share price has been going up.
Domino’s has also seen some growth, compared to the previous year, as the stock is trading between $50 to $52. With a market cap of over $2.87 billion and a dividend yield of 1.6%, Domino’s is also one of the better companies, for potential investors, in the restaurants industry
Yum! Brands, Inc.: The good
Even though Yum!’s recent chicken supply created panic amongst Chinese consumers, the country is still Yum!’s strongest target audience. David Novak, Yum!’s CEO, recently stated that the company has seen similar incidents in the past, including the avian flu case where sales went down nearly 40%. He also stated that the company has a strong presence in China, which will help it expand further. Yum!’s biggest strength has been the expansion in several new countries, with China being the company’s biggest growth opportunity.
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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