Yum Is Starting To Do Better In China

By Neal Rau

Yum! Brands, Inc. (YUM) is the biggest U.S. restaurant operator in China and that market traditionally accounts for more than half of the company's operating profit. The company had repeatedly said it expected same store sales in China to turn positive in the fourth quarter, but retracted that statement when it announced earnings last month. Now after a better than expected October same store sales in China, shares of YUM have jumped 18% in the last month. Is YUM a buy, sell or hold at current levels?

Sales at restaurants in China have seen huge declines since chemical residues were found in chicken from some of its poultry suppliers in China late last year. The timing of the company's quality issues, bad publicity, and avian flu worries in China could not have been worse, as Yum was aggressively expanding in China. In 2012, Yum added 889 new restaurants in China alone, as operating profit from the region surpassed $1 billion for the first time. The October same store sales have investors hoping the company has finally turned the corner, and the China concerns could be subsiding.

YUM recently announced a reorganization that would combine the U.S. and international divisions of KFC, Pizza Hut and Taco Bell and keep its China and India units separate as part of a reorganization. International growth and same store sales figures highlighted by China and India will be key going forward. Yum expects to have 1,000 restaurants total in India by 2015, and plans to invest $10 billion in emerging markets by 2020. The reorganization will be effective from January 1 and beginning fiscal year 2014 the company will report results for KFC, Pizza Hut and Taco Bell and for its China and India divisions.

September China same-store sales declined around 11%, including a 6% gain at Pizza Hut, and a sequentially worse 13% fall at KFC. However, YUM has clearly not been the only consumer company in China to see weak sales in recent quarters. McDonald's Corporation (MCD) and Starbucks Corporation (SBUX) have both seen a marked slowdown in same store sales in that market over the past year. This suggests a strong cyclical element underlies YUM's China issues.

Looking at October, same store sales in its struggling China division reported a 5% decrease for the month. The company's China division dropped 7% at KFC, offset by a 10% increase at Pizza Hut Casual Dining. This was the company's best performance in eight months in China and it shows that the company has some traction. October same store sales in China suggest that the bad news in China might behind the company now, which has been pushing shares higher. The stock is trading near 52-week highs and based on the real-time trading report published by Stock Traders Daily, shares have broken above long-term resistance, which is now converted support.

In the United States, McDonald's has 14,000 traditional units in a population of over 310 million. YUM expects to have at least that many units in China with the consuming class growing from 300 million to 600 million over time and disposable income growing along with it. The CEO said during the most recent conference call, that the company would be everywhere that matters in China and have the best locations in every town. Revenues should be supported by steady franchise royalty income from the both U.S. and International segments, which are 90% franchised and generate about two-thirds of YUM's profits.

Yum shares have recovered from the disastrous September China numbers. However, year-to-date YUM is still underperforming the S&P 500. In the last five years, on average Yum has returned 25% per year, outperforming S&P's 16%, which suggest that shares may still have room to run. A near term catalyst could be when Yum releases its November same store sales for its China division on Dec. 2, ahead of its annual investor conference set for Dec. 4 in New York.

Based on the Stock Traders Daily real-time trading report, the stock has broken above long-term resistance, which is now converted support. That is a very bullish sign, and so far converted support is holding, and as long as that remains true, the rules that govern our strategies tell us to expect higher levels. We are buyers of YUM at that converted support level, as long as converted support holds. To control risk on this trade, use converted support as your stop loss, as defined in the real-time YUM trading report published by Stock Traders Daily.

Source: Yum Is Starting To Do Better In China

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Business relationship disclosure: By Neal Rau for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.

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