The last time I checked on with Yum! Brands, Inc. (NYSE:YUM), the company had cashed out its China investments through a spin-off called Yum! China Holdings Inc (NYSE:YUMC), and presumably focusing more on the U.S. market.
It’s been almost 14 months since that separation; how’s that going?
Earlier this month, Yum China was downgraded to sell by Zacks, as Yum! itself focuses on developing its three restaurant chains — Kentucky Fried Chicken, Pizza Hut, and Taco Bell – selling franchises and looking for efficiencies.
This is akin to the McDonald’s Corporation (NYSE:MCD) strategy under its CEO, Steve Easterbrook. Most costs, and risks, lie in running the restaurants, so find strong owners and make money. McDonald’s is up 41% this year.
So, YUM is now a great American company with minimal foreign exposure, right? Wrong.
On to India
Yum! has apparently decided that what India, the land of naan and paratha, needs more than anything else is pizza. Pizza Hut is operating in India through franchisees, and now plans to double its India store count to 700 over the next five years.
This is a lower-risk strategy than building and owning stores. By using key corporate franchisees — Deyvani International and Sapphire Foods India — the company gets to keep the higher-profit position of franchisor while keeping ears to the ground about local tastes.
YUM stock is up 30% this year and the strategic shift is already showing up on the bottom line. For the quarter ending in September, Yum! earned $418 million, $1.18 per share, on revenue of $1.44 billion. Revenues are flat, but margins have skyrocketed, with almost 30 cents on every dollar hitting the net income line. Net margins have nearly doubled from a year ago.
CEO Greg Creel, an Australian, said he wants his franchisees to try different things, believing that with 44,000 stores “you can do something in one restaurant” that, if it works, can become something big for the parent. A lot of what Creel is trying is at Pizza Hut, which has been lagging the pizza group but is getting new investment in marketing and delivery.
The reaction among analysts to the new strategy has been positive. None of the 25 analysts currently following the stock are advising it be sold.
InvestorPlace writers are absolutely effusive.
Luke Lango calls Yum! “a solid long-term holding with huge margin growth drivers.” James Brumley says it is “worth every penny” an investor puts into it after a third quarter earnings beat that sent the stock up 6%. Lawrence Meyers says “everyone needs” what the company is selling , although my own waistline would like fewer pizzas and fried foods.
The Bottom Line on YUM Stock
Yum! has chosen the road to high profit growth at minimal risk. That’s proving positive for YUM stock investors.
That road shows that franchising stores is more profitable than running them, so long as you control your franchisors enough to maintain quality.
Yum! found it had control problems in China, and decided to exit the market, but that does not mean it’s giving up on international opportunities, as its expansion in India proves. In fact, Yum! has about 9,000 restaurants outside the U.S.
With U.S. growth remaining slow, and more people falling into the lower and middle class rungs of society, fast food is the only food people are going to eat outside the home. Our family was in this situation for many years. There’s nothing wrong with it.
Nothing wrong with making money off it by buying YUM stock, either.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.