This post discusses Yum! Brands (YUM) and McDonald's (MCD).
A report released by the World Economic Forum, ahead of its annual meeting later this month, said that China's gross domestic product could slow to less than 6% from an estimated 11.9% in 2007. Yum! Brands (YUM), which generates 27% of its revenue and most of its earnings growth in China, is facing investor skepticism, which has driven its shares down 28% from their 52-week high, versus a decline of just 11% for McDonald's (MCD).
Fueling investor trepidation is Yum!'s recent 2009 operating income guidance, which targeted growth of 15% to 20%, below its 20% growth trend for the region. Though 2009 will be a challenging year for Yum!'s China operations, with declining same-store sales (3% expected in the first half of 2009, improving to 7% in the second half of the year), three-quarters of its growth in the region is from new unit additions, all of which are company-owned and self-funded through Yum!'s free cash flow.
Investors should focus on Yum!'s huge lead over McDonald's, its nearest competitor, in market share and brand awareness with 3,000 units in China, its strong international operations outside of China, and its viable plans to cut overhead costs and improve KFC's U.S. business through a launch of grilled chicken wraps that will cater to healthier eating trends.
Though the current P/E multiple of 14.5x appears pricey relative to Yum!'s depressed 2009 earnings growth target of 10%, it is reasonable given the company's ability to consistently generate ROICs [returns on invested capital] near 30% and its potential to elevate earnings growth to 13% in 2010 and beyond.
Read the full analyst report on YUM.
Read the full analyst report on MCD.
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