The company’s stock has historically been investor friendly and has provided an astonishing 80% return since 2008. There has been a slight dip in performance in the recent past due to various reasons, but I don’t feel skeptical about investing in this stock. The company will continue to provide decent returns and has long-term potential. In this article I will explain why.
Stock performance history
During the last year, Yum! Brands, Inc. (NYSE:YUM) traded at around $75 and clocked revenue of $13 billion. The 50-day moving average of the stock is currently $71. Revenues in the past two quarters have also been decent for the company. With a price-to-earnings (P/E) ratio of 19.43, it has high growth prospects. In 2012, Yum! Brands, Inc. (NYSE:YUM) reported growth in sales and profit figures in all of its divisions, including India and China. This shows that the company has proved to be an exceptional performer historically.
Issues in China, but the company will bounce back
Growing cases of avian flu in China has made Yum! Brands a little unpopular in the short term. Around 50% of Yum!’s business comes from China. This has naturally been a point of concern for investors. But, let us consider this fact. 70% of Yum!’s operating profit comes from its international business division. The company’s huge international presence is its primary growth catalyst and that is what has been making the company’s growth valuations sustainable. In 2011, Yum! Brands, Inc. (NYSE:YUM) also faced a dip in sales and has bounced back quite strongly. There are still plenty of markets to explore. Even existing markets are not saturated yet. With such a strong brand equity, Yum! will definitely curve its way out and confirm its dominance once again.
Competitive market
McDonald’s Corporation (NYSE:MCD) is a tough competitor for Yum! Brands, Inc. (NYSE:YUM) as it is evenly spread globally while Yum! relies too heavily on the Chinese market. Yum! should keep a close eye on McDonald’s Corporation (NYSE:MCD) as it is planning to open more than 1,500 restaurants around the world and has further expansion plans in the pipeline. McDonald’s adjusts itself pretty well with the local tastes, both in terms of menu offerings and price. Notwithstanding the economic downturn, the company’s revenue rose which suggests that it is economy-resistant. Both Yum! Brands, Inc. (NYSE:YUM) and McDonald’s were affected due to the demand slump in China, but McDonald’s Corporation (NYSE:MCD) came out of it faster. The company’s stock has good fundamentals and with several expansion plans down the line, McDonald’s has strong growth prospects too.
Domino’s Pizza, Inc. (NYSE:DPZ) has also a significant widespread international footprint and a tough competitor for Yum!. It is known as the pizza delivery expert and generates most of its sales through its home delivery option. Earnings per share growth has been high in the last five years and the company is expected to grow further. The company’s biggest advantage is its relatively low price point compared to Pizza Hut which gives an edge to its offerings. Some of the risks of Domino’s Pizza, Inc. (NYSE:DPZ) outweigh its benefits, however. These include its high leverage, limited growth opportunities in the domestic marketplace and its high advertisement expenditure. These factors limit the company’s growth prospects, putting it slightly behind than the other players in the market.
Future outlook for Yum!
Looking at the stock price behavior of Yum! Brands, Inc. (NYSE:YUM), it lost much of its value before but now has gained some of it back. There is no need for investors to panic. Yum! has many more positives going for it and will be able to bounce back from this brief downturn. It has plans to expand outside China and India, and has already opened 40 restaurants in the UK and Ireland where Domino’s Pizza, Inc. (NYSE:DPZ) and McDonald’s have a significant presence.
Yum! Brands, Inc. (NYSE:YUM) has been reacting quickly to the challenge of increasing sales in China and has the capability to beat the competition in other markets too. I see the company’s stock gaining momentum in the coming few months and eventually getting back to its historically high-yielding nature. With the stock still having a lot of value, I would recommend that investors keep their faith in the company and buy it to gain in the long term.
The article Yum! Brands Still Has a Lot of Potential originally appeared on Fool.com and is written by Tanya Kanodia.
Tanya Kanodia has no position in any stocks mentioned. The Motley Fool recommends McDonald’s. The Motley Fool owns shares of McDonald’s. Tanya is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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