The owner of global chains KFC and Pizza Hut has developed a
reputation as the fast food stock to own to invest in the Chinese
stomach. As a result, Yum Brands (
YUM
,
quote
) shares are now arguably super-sized relative to more interesting
local favorites.
[caption id="attachment_60544" align="alignright" width="300"
caption="KFC in Beijing"]
[/caption]
Everyone in the market chatters on about YUM as
the way into the breadbasket
of Asia. From the company's perspective, the world's largest
population is definitely the key to growth -- same-store sales in
China jumped 14% last quarter while sales just about
everywhere else trailed at a relatively sedate 5% growth rate.
As a result, the company is betting the franchise on China in
particular, boosting its number of locations in the country by 3%
between January and March while its
once-hyped expansion
into India stalls and the number of U.S. restaurants actually
declines.
Unfortunately, while China now accounts for 50% more KFC and
Pizza Hut locations than the rest of Asia -- not counting India and
Japan, which report separately -- put together, the rest of Asia is
stalling for the company. Store for store, YUM's non-Chinese Asian
operations seem to be growing only as fast as the U.S. region.
If China falters, YUM looks deeply overvalued compared to rivals
like McDonalds (
MCD
,
quote
), which is also
ramping up fast in Asia
, although without quite so much hoopla on Wall Street. YUM is
priced at over 22 times trailing earnings while MCD is currently
trading at a P/E of 17.
But as it happens, local favorite Country Style Cooking (
CCSC
,
quote
) is
reporting its first quarter
today, and you're looking at a P/E of maybe 3 there if the results
go as analysts expect.
Is YUM growing its business more aggressively than CSCC? Not at
all. While the Chinese chain is very small compared to YUM -- which
is building more new restaurants in China every quarter than CSCC
has total locations -- it offers extremely high intensity on a
location-by-location basis, as well as growth off a much lower
base.
Every 10 restaurants CSCC opens moves the growth needle 7%. It
takes YUM 350 new locations to generate the same result.
Sure, CSCC may find itself surrounded and taken over by a vast
rival and its profitability has stuttered as it expands. But in the
former case, YUM has already proved its willingness to buy a local
competitor rather than fight, so the M&A premium could be a
nice reward in itself.
And in the latter case, while CCSC has posted the occasional bad
quarter, the trend is recovering.
