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From Staff Reports
With its 'robust' cash flows and terrific international growth prospects – especially in China – restaurant operator Yum Brands Inc. (YUM) remains a "Buy," Deutsche Bank Securities (DB) analysts said yesterday (Thursday). The Yum Brands target price has been raised from $38 to $43, Deutsche Bank Securities said.
Shares of Yum Brands – the PepsiCo (PEP) spin-off and current operator of the Pizza Hut, KFC and Taco Bell restaurant chains – soared more than 11% over a two-day period early this week after the company on Monday posted a higher-than-expected 17% jump in quarterly profits.
The shares closed yesterday at $37.24, down 87 cents, or 2.28% each. From there, hitting the $43 price target would represent a gain of 15.47%.
The Louisville, Ky.-based Yum also boosted its guidance to Wall Street, stating that it now expects profits per share for the year to climb 13%, and not just the 12% predicted earlier. The company is now forecasting full-year profits of $1.65 per share, instead of the $1.63 forecasted earlier.
Analysts currently expect a profit of $1.64 a share for the year, according to Reuters Estimates.
Yum said strength in China and in other international markets more than made up for softer-than-planned-for results here in the United States.
In Yum Brand's China Division – which includes mainland China, Thailand and KFC Taiwan – operating profit rose a stunning 28%, reaching $135 million. But fast-rising food-and-labor costs in mainland China did squeeze profit margins, albeit only slightly for now, the company said.
At the international division, which excludes China, operating profit rose 21%, reaching $127 million.
Total revenue rose 13% to $2.56 billion – $100 million more than the $2.46 billion analysts expected.
Sales at stores open at least a year rose by an average of 4% worldwide. But that overall average included gains of 11% in mainland China, an average of 7% in the international division, and 1% in the United States.
And we believe this latest outlook boost is just the start. One good reason: Yum said it would use the flush times to buy back as much as $1.25 billion of additional company stock over the next 12 months – part of an existing Yum Brands plan to buy back up to $4 billion in shares over the next two years. That will reduced the company's total shares outstanding by 20%.
The stock trades at about 19.8 times analysts' average 2008 earnings estimate, compared with a multiple of about 18 for rival McDonald's. If both stocks were valued like their peer companies, both companies could experience substantial share-price growth during the next several years. Since both are solid plays on China's growth, that makes sense. Add in PepsiCo Inc. (PEP) and The Coca-Cola Co. (KO) for good measure, and you have a portfolio of four U.S.-based plays on China's growth.
[For our full research report on Yum Brands, please click here. It's free of charge.]
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