Yum! Brands Inc. (YUM) continues to deliver impressive results overseas. The company recently reported better than expected results for the fourth quarter, driven by exceptional top-line growth in China.
Based on current consensus estimates, analysts project double-digit EPS growth for Yum! over the next several years. It is a Zacks #2 Rank (Buy).
In addition to this growth, the company pays a dividend that yields a solid 1.8%.
Crazy for the Colonel in China
Yum! Brands is one of the largest fast food restaurant companies in the world. It owns 3 globally-recognized brands: KFC, Pizza Hut, and Taco Bell.
The company has been expanding aggressively overseas, particularly in China, where it opened 656 restaurants in 2011, including 327 in the fourth quarter. And why not? Same-store sales rose an incredible 19% there in 2011. It is now the Yum!’s largest division in terms of revenue:
China: 44% of total revenue in 2011
United States: 30%
Yum! Restaurants International (excludes China): 26%
Fourth Quarter Results
Yum! Brands delivered strong fourth quarter results after the bell on February 6. Earnings per share came in at 75 cents, beating the Zacks Consensus Estimate by a penny. It was a stellar 20% increase over the same quarter last year.
Total revenue surged 15% to $4.111 billion, ahead of the Zacks Consensus Estimate of $4.030 billion. Excluding foreign currency effects, worldwide system sales were up 11%. Same-store sales rose an incredible 21% in China, 3% at YRI, and 1% in the U.S.
Operating profit rose 14% as rising commodity costs were somewhat offset by fixed expense leverage. When you break it down by division, the company’s operating margin was widest in the YRI segment at 19.7%. China’s was the thinnest at 11.2% as Yum! had to combat 8% commodity inflation and 20% wage rate inflation. The U.S. was in the middle at 16.1%.
Outlook
Expect analysts to raise their estimates following the solid Q4. The current Zacks Consensus Estimate for 2011 is $3.23, representing 12% EPS growth. The 2012 consensus estimate is 14% at $3.69.
It is currently a Zacks #2 Rank (Buy).
Returning Value to Shareholders
In addition to strong growth, Yum! pays a dividend that yields a solid 1.8%. Since it began paying a dividend in 2004, the company has increased it every year at a double-digit rate.
The company also repurchased 14.3 million shares for approximately $733 million in 2011. That should help boost EPS down the road.
Shares of YUM have been on a tear over the last 6 weeks, rising over 20%. But the valuation picture still looks reasonable.
Shares trade around 20x the 2012 consensus estimate, above the industry average of 15x. But this premium seems justified given the company’s above-average growth prospects.
The Bottom Line
With strong earnings growth, a solid 1.8% dividend yield and reasonable valuation, Yum! offers investors a lot of upside potential.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
