Buy Yum! Brands Stock Before This Happens


On Thursday, Taco Bell, Pizza Hut, and KFC operator Yum! Brands reported second-quarter earnings per share of $0.61, down 11.7% from the same year-ago period. Excluding special items, earnings per share dropped to $0.56 from $0.67 during the second quarter of 2012.

Meanwhile, revenue fell 8.5% over the same period, to $2.9 billion, hurt primarily by a 20% fall in quarterly same-store sales from the company's China Division, which itself drove China system sales down 12%.

yum stock
yum stock

Image source: Yum! Brands

Now that all sounds scary enough, so why did Yum! Brands stock only fall 1.1% when all was said and done Thursday?

When less-bad is great
Remember, Yum! Brands' troubles in China began late last year when the Chinese government identified a local company, which had supplied tainted chicken to both Yum! and McDonald's restaurants in the region.

McDonald's Asia/Pacific sales also suffered a 9.5% decline in January as a result, but with less than 2,000 McDonald's restaurants in China compared to Yum!'s more than 6,000 locations, Mickey D's exposure to the fallout was much less extreme. Even so, while the bad poultry wasn't exactly Yum! Brands' fault, the company still apologized, and quickly cut ties with the supplier in question. In addition, both Yum! and McDonald's promised process improvements in the region to prevent such quality lapses from recurring.

Then, just as Chinese consumer sentiment toward both companies had begun to improve, significant negative media coverage surrounding Avian flu in the country once again devastated Yum!'s China sales, setting off the following chain of year-over-year same-store sales decreases since then:

  • March: China same-store sales drop 13%

  • April: China same-store sales plummet 29%

  • May: China same-store sales plunge 19%

  • June (released Wednesday): China same-store sales fall 10%

When you look at it that way, it sure seems as though the worst of the storm has passed.

In fact, that's why Yum!'s earnings press release Wednesday also noted last month's 10% decline not only included a 13% fall at KFC, but also 6% growth at China Pizza Hut locations.

Buy before this happens
What's more, though Yum! maintained its previous outlook for a "mid-single-digit full-year EPS decline" from last year's overall results, it also stated China Division same-store sales are expected to continue to recover over the course of the year, finally posting positive comps in the fourth quarter.

Of course, it's also important to note Yum!'s total quarterly system sales still managed to grow 1% in spite of its weakness in China, thanks to a 6% boost from Yum! Restaurants' International and moderate 2% growth in its enormous U.S. market. In addition, Yum! Brands also managed to open 315 new locations internationally last quarter, with more than three quarters of those in emerging markets.

Foolish takeaway
Finally, when you add to that Yum! Brand's recently outlined plans to double domestic Taco Bell sales to around $14 billion over the next eight years, part of which includes a nationwide rollout of breakfast offerings at the chain by the end of 2014, YUM stock is starting to look more appealing by the day.

For now, though, I'm convinced there's little need to wait and see how Yum! Brands' recovery in China pans out. To the contrary, I think it's apparent the recovery is well under way, so investors would be wise to buy shares of this growing business before it's complete.

However, if Yum! Brands still isn't enough to whet your appetite -- and if you're looking for more ways to profit from the global economy -- remember it can be as easy as investing in your own backyard. The Motley Fool's free report, "3 American Companies Set to Dominate the World," shows you how. Click here to get your free copy before it's gone.

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Fool contributor Steve Symington has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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