Home > Stock Analysis

Yum! Brands Not So Yummy Earnings

Posted: Feb 11, 2010 10:28 AM by Greg Sushinsky

Tickers in this Article: BKC, CMG, MCD, WEN, YUM

Yum! Brands, Inc. (NYSE:YUM) posted overall income gains in the fourth quarter, led by the company's performance in China. This offset a poor U.S. performance for the owner of household restaurant names Taco Bell and Pizza Hut. It highlights a continuing difficult environment in the fast food space. (Thinking about buying a franchise? Check out Is Buying A Franchise Wise?)

Get Free Stock Analysis By Email

IN PICTURES: Digging Out Of Debt In 8 Steps

China Up, U.S. Down
China operating profits were up 24% for the quarter, while U.S. income fell 23%. Operating profit fell from $194 million to $150 million in the U.S. overall, Yum earned 45 cents in the fourth quarter versus 43 cents last year, or 50 cents and 46 cents on an adjusted basis. Income was $216 million compared with $204 million in the same quarter last year. Revenue was essentially flat for the quarter and down slightly for the year, although the company earned an unexpected $1.07 billion, surpassing analysts' expectations.

Trend Not Friendly
Yum! Brands had similar factors play into its earnings as did Burger King (NYSE:BKC), where currency exchanges contributed to a superficially good looking earnings report. What the market is looking for in both cases is better comps, which weren't there for either business. Same store sales fell 5% at Taco Bell and 12% at Pizza Hut. Predictably, the market didn't like the report and pushed the stock down.

Difficult Dining
The fast food industry has been slogging through the recession, so Yum! Brands is in plenty of company. Recently, Wendy's/Arby's (NYSE:WEN) announced the president of its Arby's group will be leaving. Wendy's, still in its turnaround attempt, has seen its Arby's segment lag.

There are some bright spots in the industry. Chipotle Mexican Grill (NYSE:CMG), still has sizzling earnings growth trajectory which is projected to continue. McDonald's (NYSE:MCD), which has the golden (arches') touch in practically any economic environment, saw its January sales rise 9.1, though U.S. sales were slightly down by 0.1%.

What They're Doing
Yum remains, like Burger King, focused on price. Burger King has gotten a boost from its $1 double-cheeseburger, despite franchisees' loud resistance. Yum's $10 pizza reversed negative sales at Pizza Hut in January, so there may be some wiggle room to raise some item prices. Pizza Hut has also added pasta and chicken wings, while KFC introduced its grilled chicken last year and has pushed it hard in ads. There are limits to what can be done with any fast food menu, not just for Yum but with its competitors. Execution, as McDonald's shows, is still primary.

When Will Yum Be Yummy Again?
Despite the holes in the earnings report and the weakness in U.S. sales, for the longer time horizon, Yum! Brands remains in a solid position in the industry. It has desired brands, a diverse restaurant portfolio, and is well managed. Now it needs for the economy to kick in. Even with 2010 looking still a bit murky, Yum's outlook for a 10% profit increase speaks well of its longer term prospects.

The stock sells at just under 15 times earnings. In the short term, Yum will struggle, but long term it's a solid performer in the industry you might want to own, especially if its stock price edges down into the $20s. (Trim the fat from your grocery bill to reduce the impact of food cost on your budget. To learn more, read 22 Ways To Fight Rising Food Prices.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

Filed Under: Stock Analysis,Stocks

Rate this Article: Your Rating: Overall Rating: Vote Now!