The past weekend's news that China will allow its
, the yuan, to appreciate against the dollar sent positive waves
through the market for much of Monday's trading session. Aluminum
and steel stocks
, as were
domestic consumer plays
in mainland China. But, as StreetAuthority's David Sterman
, it may take years before the benefits are realized.
That's why it's important to take a step back. Rather than using
the weekend's news as the sole reason to buy a particular stock,
investors should use it as one more reason to buy shares of
companies that will capitalize on catalysts that are already at
work -- and will be for years to come.
The biggest and yet one of the least talked-about stories related
to China is its emerging middle class. Chinese officials worry
about having to rely on American and European consumers to grow
their economy -- rightly so, considering recent economic crises.
It's in China's long-term interest to have a stronger currency,
rising wages and at least a partial social safety net so its
citizens will be encouraged to save less and spend more.
Fact: China already has a middle class of about 300 million people.
That number is expected to exceed 500 million in 10 years.
Some more interesting facts: Nearly one new Kentucky Fried Chicken
fast food restaurant opens in China every day. There are almost
4,000 KFC locations in China, compared to only about 1,100
McDonald's locations. Soon, there will be more KFCs in China than
in the United States.
And that's not all that KFC parent
Yum Brands (NYSE:
has been up to. . .
The company opened more than 1,400 new restaurants around the world
in 2009 -- 509 of those were in China. Yum operates and franchises
the KFC, Pizza Hut and Taco Bell brands, among others, and now has
nearly 35,000 locations worldwide.
Yum isn't just a global play with a partial China angle -- it has a
major footprint in the country. And there's good reason behind the
aggressive expansion in China -- 34% of Yum's 2009 revenue came
from its Chinese locations, despite having just over 10% of its
total locations in the country.
The average Yum fast food location in China carries margins of more
than 20%, according to its most recent
, and can achieve "cash payback" within two to three years.
The global recession caused Yum's same store sales to be flat,
except in China, where sales grew +10%. Profits from Chinese
operations were up +29% in 2009 after growing +28% in 2008.
The entire company carries an
of 14% -- not bad for the restaurant business. The global slowdown
didn't hurt Yum too bad either. In fact, earnings per share grew by
+13% in 2009.
Yum believes its brands, particularly KFC, can be as prevalent in
is in the United States. The company has been generous to
shareholders, having paid $8 billion in dividends and share
repurchases since it spun off from
in 1997. And speaking of McDonald's, Yum's stock has outrun its
golden-arched rival during the past 10 years with a gain of +640%
compared to +160%.
Action to Take -->
Yum has ambitious goals for China. Given its success so far,
there's no reason to doubt that's possible. At less than 19 times
earnings, the stock is reasonably valued on both a historical basis
and compared to its peers, considering its long-term potential for
The stock's 2% yield may not seem appealing at first, but consider
that this is still a company that is expected to grow +12% annually
during the next five years. The
has grown about +33% during the past five years, yet the company
still pays out about 35% of earnings. Don't be surprised to see a
steadily rising dividend, especially once management feels it has
reached its potential for expansion.
Disclosure: Brad Briggs owns shares of Neither StreetAuthority
and LCC nor the editor hold positions in any securities mentioned
in this report..
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