Yum! Puts Value and Growth on the Menu

Jim Cramer says Yum! Brands (YUM - commentary - Cramer's Take) is the best way to play China's growing appetite for protein. Yum! management has called China its number-one growth strategy, and expects to have 3,000 stores in the country by year-end.

To my mind, the fundamentals look tasty enough to take a bite of, regardless of whether it is the "best" play on China or simply a good one. The company has three other growth prongs as well: aggressive international expansion outside China; improving U.S. brand positions, consistency and returns; and driving industry-leading long-term shareholder and franchisee value.

Yum! seems to be executing on all fronts. International sales were up 15% in the first quarter, with 18% growth in operating profits. U.S. brands posted 3% same-store sales growth, reversing the negative comps experienced last year, and returns on invested capital are 18%.

Expansions of the Pizza Hut menu, including pasta and wings, could help that brand attract cost-conscious casual diners, while Taco Bell is already positioned as the fast-food value leader. All in all, I think Yum! is well positioned to weather tough economic conditions.

Against that backdrop, shares have fallen more than 10% in the last month in this tough market environment. Yum! is set to report earnings in the middle of July.

Modest Concerns

I'd usually be concerned by the stock's recent drop through the 200-day moving average. However, given that this has happened several times over the last year, and the previous examples were followed by 25%-30% gains in the months that followed, I'm not treating the signal as bearish in this case.

As Scott Rothbort notes, the greater concern is the potential for rising commodity prices and slower consumer spending to take a bite out of profits for a few quarters. So far, though, the consensus on Wall Street is for the opposite to happen. Over the last 90 days, earnings estimates for both 2008 and 2009 have increased by $0.02-$0.03 per share.

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At the time of publication, Trent had no positions in the stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.