China Is Good News And Bad News For Yum Brands

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Based in Louisville, Ky.,Yum Brands ( YUM ) might be regarded as a China-based company if you look only at revenue.

Through 2006, America provided the biggest revenue footprint for the parent company of KFC, Pizza Hut and Taco Bell. In 2007, the international side edged ahead of the U.S. segment. In 2010, China alone passed the U.S. in generating revenue for Yum.

And now? It isn't even close.

In Q2, China accounted for 49% of Yum's revenue, while the U.S. delivered 26%. The company also sees great potential in India, but India currently provides less than 1% of revenue. Other countries -- other than China and India -- make up 24% of revenue.

China is a good-news and bad-news scenario for Yum.

The good news is the long-term situation.

"The most compelling stat we have is we only have four restaurants per 1 million people in China compared to nearly 60 in the United States," CEO David Novak said at the July 19 earnings call. He added that the consuming class in China "is expected to double to over 600 million people by 2020."

The bad news is China's short-term outlook.

"There's no question that China's economy is slowing and sales for retailers, including us, will likely soften, especially as we overlap such strong performance from last year," Novak said at the call.

Yum, though, isn't putting all its chips on China. "By the end of the year, we expect to be in about 20 African countries with tremendous growth potential," Novak said.

Yum also plans to add more than 100 restaurants in India this year. As of the July call, Yum had 479.

In Q2, earnings growth slowed to 2% from 19% and 21% in the previous two quarters. Yum has one of the steadiest earnings track records in IBD's database.

Revenue growth was 13%, roughly in line with recent quarters. The Street expects 17% EPS growth on a sales gain of 11% in Q3. Yum is expected to report in early October.

Yum has more than doubled its dividend over the past five years. The annualized yield is 2%.

The stock is working on a stage-two base.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Investing Ideas

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