) just can't seem to get its two big growth engines, China and the United States, revving at the same time.
Still, Wednesday's earnings report shows good progress in getting growth going again at the company's U.S. operations, especially the long-lagging Taco Bell franchise. Growth in China slowed with the Chinese economy, but if you believe, as I do, that China's growth rate is likely to pick up in the second half of the year, then that's a problem for Yum Brands that will fix itself.
For the first quarter, earnings climbed to 76 cents a share, excluding one-time items. That was 3 cents a share above Wall Street projections and a 40.7% increase from the first quarter of 2011. Revenue climbed 13% to $2.74 billion. Wall Street had been expecting revenue of $2.71 billion. First-quarter 2011 revenue was $2.43 billion.
Hear analyst views of Yum Brands in the following video.
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The big story was the 5% increase in same-store sales in the United States, led by the beginnings of a turnaround at the company's Taco Bell franchise. Operating profit grew by 14% in China, 9% for the company's international unit, and 27% in the United States. In past quarters, declining results from Taco Bell had been a drag on the company's U.S. business. By adding breakfast items and beginning the roll-out of a new menu, the company seems to have ended that decline. Comparable-store sales at Taco Bell were up 6% year to year.
Results in China, where Yum operates 4,600 stores, weren't terrible, but margins did fall to 23.6% from 25.1% in the first quarter of 2011 as wages and food costs rose. The company opened 168 new stores in China in the first quarter, and in February it closed on its acquisition of Chinese Mongolian hotpot chain Little Sheep. Same-store sales in China grew by 13% at KFC stores and 18% at Pizza Hut Casual Dining. The 14% increase in same-store sales in the quarter was a decline from the 21% same-store sales growth in the fourth quarter of 2011. Same-store sales in China grew by 13% in the first quarter of 2011.
The biggest story internationally is the creation of a new group for India. Yum Brands plans to open 100 stores in India in 2012. Sales in the first quarter grew by 34% in the country.
In its conference call the company raised its forecast for 2012 profit growth to "at least 12%" from an earlier forecast of at least 10%. At a forecast $3.22 a share in 2012 earnings, the stock traded at 22.2 times projected 2012 earnings per share Thursday. Shares were down by 1.6% on the earnings report.
At that price-to-earnings ratio, Yum Brands certainly isn't cheap. Wall Street's consensus estimate calls for 14% earnings growth in 2012 and 15% in 2013. You are definitely paying some premium for the company's No. 1 position in China's quick-serve and fast-casual restaurant market. But the premium isn't huge. McDonald's
), which doesn't have nearly Yum Brands' presence in the Chinese market, trades at a PEG ratio (PE-to-growth rate) of 1.75 versus a PEG ratio at Yum Brands of 1.81.
If you think growth in China will pick up in the second half of the year and that the growth of incomes in China means that China's middle class will continue to expand, the premium doesn't seem out of line given the company's market share in China. (The company sees China adding 300 million middle class potential customers over the next 10 years.)
I'd find these shares attractive on a pull back to near the 50-day moving average at $68.
At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of Yum Brands as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.
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