Tricon Profit Machine Facing Tougher Comps

And the company's earnings growth is matched only by its stock appreciation.

Author:: Diane Hess
Publish date:: Apr 30, 2002 5:17 PM EDT

Restaurant operator

Tricon Global's

earnings soared 41% in the first quarter, but because the stock's run is even stronger since October, some say it's time to take profits.

Since a low in October, shares of Tricon Global are up 66% as investors looked for stable places to invest in the midst of a recession. The stock ended up Tuesday another $1.79, or 2.9%, at $63.06.

Some analysts think restaurants' role as safe havens has run its course. "I'm very bullish on Tricon Global and its long-term prospects," said Tony Howard, an analyst at Hilliard Lyons. "But I think investors forget that there is a difference between the company and its stock price." (Hilliard Lyons does not have a banking relationship with Tricon Global.)

Howard thinks Tricon is fairly valued at a

price-to-earnings ratio of 15, assuming a long-term earnings growth rate of 10% to 12%. Based on 2002 earnings, the restaurant operator has a P/E of 17.3.

Other analysts came out with more positive comments. "In a best-case situation, the stock could trade up toward a P/E of 20," said Mark Kalinowski, an analyst at Salomon Smith Barney. "There's room for some multiple expansion." (Salomon Smith Barney has a banking relationship with Tricon.)

Tricon Global -- which operates Taco Bell, KFC and Pizza Hut restaurants -- said it earned $124 million, or 80 cents a share, in the first quarter, compared with $88 million, or 59 cents a share, a year ago. Analysts were expecting earnings of 77 cents a share, according to Thomson Financial/First Call.

The restaurant chain's results were helped by brisk international growth in the first quarter -- it was up 7% overseas. In China, growth surged 35%, while it gained 15% in Mexico and 15% in South Korea.

Restaurant margins rose 1.9 percentage points in the U.S., buoyed by a 5% gain in

same-store sales. Looking ahead, Tricon said it expects same-restaurant sales growth of 2% in the U.S.

"As the year progresses, the comparisons will get tougher," said Howard. "I think the 2% target is achievable, but it could be tough to make, given the competitive environment."

Tricon estimates that April same-store sales rose 2% in the U.S., with a 9% gain at Taco Bell, 1% advance at KFC and 3% decline at Pizza Hut. The company added that international sales for April jumped 12%.

But beginning in the fourth quarter of last year, Taco Bell had strong sales numbers. "It could be difficult for the company to overlap those numbers," said Howard. Still, the company forecast earnings of 83 cents to 87 cents a share for the second quarter, and $3.63 to $3.70 a share for 2002, above analysts' consensus estimates, according to Thomson Financial.

In March, Tricon Global -- which has proposed to change its name to Yum! Brands -- announced that it would acquire Long John Silver's and A&W All American Food Restaurants, for $320 million. The company said the acquisition enables it to potentially multibrand 12,000 of its 17,000 restaurants.