Yum! Brands (YUM) is Making Strides in China

Yum! Brands, Inc. (NYSE:YUM) reported its third-quarter last month and said profits fell 68%, as the company's Chinese operations continued to weigh on its performance.  Earlier this year the company said that same-store sales in China would turn positive sometime during the fourth quarter, however shares plunged when YUM stated that that was not going to happen in the very near future.  Shares have since rebounded sharply, as the stock is up 18% over the last month.  Are shares of YUM still a buy at current levels?

YUM shareholders have had plenty of concerns over the last year.  The company has been dealing with quality issues, bad publicity, and avian flu worries in China, where Yum has been aggressively expanding.  In 2012, Yum added almost 900 new restaurants in China alone, and operating profit from the region surpassed $1 billion for the first time. 

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 (NYSE:MCD) and Starbucks Corporation (NASDAQ: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.

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