The best way to decide whether to invest in a company is to perform a SWOT analysis. Below I present a SWOT analysis on Yum! Brands, Inc.
(NYSE:YUM)! Brands to understand whether it is a worthwhile investment.
Strengths
Yum! Brands, Inc. (NYSE:YUM)’s biggest strength is its number of restaurants. It is one of the largest quick service restaurants (QSR) with 37,000 units in more than 120 countries. It operates under three brands KFC, Pizza Hut and Taco Bell.
It has posted sales growth consistently in four out of the last five years. The dip in FY09 should not be a major concern as it was due to weak economic conditions, which plagued the entire restaurant industry. But it is important to note that despite this dip in FY09 it was able to maintain its operating margin at 14%. In the past five years, it has been able to maintain average margins of 15%.
Now to investors’ concerns: dividend policy and share price appreciation. Yum has a strong dividend policy and has consistently increased its dividends by an average of 15% in the last five years. This year, it increased its dividend by double digits for the eight consecutive year. However, the dividend payout ratio needs to be monitored closely.
Further, its share price has increased 95% in the last five years.
Weakness
Yum! Brands, Inc. (NYSE:YUM)’s biggest weakness is its dependence on China. ~50% of its FY12 sales came from China. Now one may ask why the company emphasizes China? The answer is that despite having a larger number of outlets in the US, China is a more profitable market as seen by its higher operating margins.
This over-dependence on China poses a major threat to the company due to recent events (as explained below). The company has faced severe criticism in the past few months and reported China comparable same store sales down by 6% in 4Q12.
Opportunities
Yum! Brands, Inc. (NYSE:YUM)’s opportunity lies in its international expansion. It has a strong foothold internationally as seen by the higher number of restaurants: 19,000 vs. 16,800 McDonald’s Corporation (NYSE:MCD) restaurants and 4,100 Burger King Worldwide Inc (NYSE:BKW) restaurants.
In FY12, the company set a record by opening nearly 2,000 new stores, including 889 stores in China and emerging markets. Despite problems in China, the company has said that it will continue to forge ahead with its expansion plans. It considers China to be its key engine of growth and plans to set up at least 700 new stores in FY13.
Besides China, it also plans to expand in Africa, Vietnam and Russia, which will help to maintain the momentum in its revenue growth. According to the company, it has unlimited opportunities in Africa where it has only 1,000 restaurants. Further it wants to implement its model in India as well, where it has seen 29% growth in sales driven by 27% unit growth and 5% SSS growth (4Q12 results).
To top it all, its domestic operations have seen an uptick in FY12 comparable same store sales, growing 5% vs. -1% in FY11 along with 13% growth in its FY12 operating profit.
Threats
Needless to say, the biggest current threat for Yum! Brands, Inc. (NYSE:YUM) is its Chinese operations. To provide some background on the issue, in December 2012, the company received adverse publicity in China as its chicken supply was found with an increased level of antibiotics. As a result, Yum’s business faced a major dip, and comps in China declined 6% in 4Q12 vs. its strong comps of +21% in 4Q11. At its recent earnings call, the management acknowledged that it is not sure how long it will take to restore sales in China and expects negative SSS to impact its 1Q12 results. It has suffered a 25% decline in SSS in January and February (combined).
Coming to the larger industry, the threat of negative public relations headlines is inherent within the fast food industry (e.g. McDonald’s Corporation (NYSE:MCD) faced the issue of mad cow disease and Yum! Brands, Inc. (NYSE:YUM) previously faced an avian flu scare in 2005, as a result of which its sales declined 40%). Further, recent reports of horsemeat in beef supplies in the UK have put these companies in a negative light once again.
These companies are often held responsible for various health issues, like the recent obesity epidemic. However, as consumers become more and more health conscious and move towards a healthier diet, food companies may also be faced with declining sales. A recent Bloomberg report has mentioned that U.S. adults consumed fewer calories from fast food between 2007 and 2010, an average of 11.3%, as compared to the 2003 to 2006 period, an average of 12.8%.
Competitors
Problems for McDonald’s Corporation (NYSE:MCD)’s began in October 2012 as it posted its first global monthly restaurant same store sales decline in the last nine years. The decline in its comps continued even in February, but the decline was slightly lower than analyst expectations. It has increased its focus on new food, limited-time offers and low priced food as it tries to attract US diners who have cut back on restaurant meals due to higher taxes and rising gas prices.
In contrast, Burger King has posted stronger 4Q12 global comps of 2.7% with 3.7% growth in the US. Its new menu items and promotions have helped to post better 4Q12 results vs. its lackluster results last month, with comps of 0.1% globally and 0.3% in the US. Due to its shift to franchisee-owned model it recorded a 30% decline in revenues, but its net income doubled as the revised model significantly reduced costs. However, with its recent admission of horsemeat in its UK supplies, I wonder if it will face the same fate as Yum.
Conclusion
Yum is currently facing a serious lashing due to the China issue. It has announced a 13% decline in comparable same store sales in February compared to the 22% decline in January. It is also trying to rebuild its brands and has launched a campaign for the same.
Despite the slump in its comps, many research analysts continue to maintain their ratings on the company. Many analysts view the lower decline in comps in February as a signal that the worst is over for Yum, and the focus is now on how long Yum will take to recover from this issue.
I would give Yum a “Hold” rating given its strong track record of success and growth. Only time will tell if it will be able to regain its performance in China or whether this incident will derail the company from its growth track.
The article Is This Stock Yummy or Not? originally appeared on Fool.com is written by Sujata Dutta.
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