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China Will Keep Driving Yum Brands Inc. (NYSE: YUM) to New Highs

By , Associate Editor, Money Morning •

Yum! Brands Inc. (NYSE: YUM) today (Monday) reported fourth-quarter earnings that beat The Street, highlighting the impact a strong emerging market presence can have on soaring profits.

The quick-service restaurant business that owns KFC, Taco Bell and Pizza Hut chains saw quarterly profit rise 34% to 75 cents a share. Revenue for the quarter climbed 15% to $4.11 billion.

YUM Brands Inc. Stock Price History
(NYSE: YUM)

Yum's results beat Wall Street's expectations of 74 cents a share and a 13.1% revenue increase to $4.03 billion.

The yearly earnings per share increase of 14% marked the tenth consecutive year of EPS growth of 13% or more. Monday's earnings report shook off speculation that slowing Chinese growth could hurt Yum in 2011.

In fact, its outlook is as bright as ever.

Yum Brands Inc. (NYSE: YUM): Feeding China

Strong sales in China - Yum's major revenue driver - offset the struggling U.S. business. While full-year same-store sales fell 1% in the United States, same-store sales rose 19% in China.

China's quick-service restaurant industry is expected to grow around 15% this year - almost double China's gross domestic product (GDP) growth, which is only expected to jump 8.4%. The growth outlook means other restaurants will try to cut into Yum's market share and appeal to the country's growing middle class.

"KFC and McDonald's are growing outlet numbers, but so are domestic and foreign chains plus independents," Paul French, Mintel's chief China analyst, told Reuters. "The pie is bigger, but the number of players wanting and getting a slice of it are bigger too. A rising tide does not necessarily raise all boats."

Still, Yum's strong position in the region has readied it to beat competitors. Yum was one of the first U.S. quick-service restaurant businesses to successfully profit in China. It opened its first fried-chicken outlet in the region in 1987 and now has more than 4,200 total restaurants, compared to McDonald's Corp.'s (NYSE: MCD) 1,400 stores.

Yum! Brands expects China to lead the company to 10% total sales growth in 2012.

Emerging markets contributed to 50% of Yum's operating profit in 2011, and should account for a bigger portion this year. Yum! Brands plans to open another 600 new stores in China alone, after opening a record 656 in 2011.

Now Yum is diversifying its market presence. It announced Jan. 6 that shareholders of China's leading hot pot chain, Little Sheep Group Ltd., approved a takeover by Yum. Little Sheep operates about 3,000 restaurants in China, with annual revenue of $315 million.

Yum also is becoming a household name beyond China. It's been expanding into other emerging markets and will continue its growth spurt in 2012.

"Yum! Restaurants International opened 905 new units, including 622 in high-growth emerging markets [in 2011]," Yum CEO David Novak said in an earnings statement."We are on the ground floor of growth in India, Russia and Africa, where system sales grew at strong double-digit rates."

The company plans this year to build 130 stores throughout seven countries in Africa, bringing the total number in the region to 1,000.

Yum increased its annual dividend to $1.14 per share, for the seventh consecutive year of double-digit dividend increases since it started paying a dividend in 2004.

The stock has climbed 28% in the past year and doubled since the beginning of 2010. Earnings pushed the share price up almost 3% in after-hours trading from yesterday's closing price of $63.19.

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