2 for Tuesday: Fast-Food Firm Tricon Looks Yummy

The parent of KFC, Pizza Hut and Taco Bell may well dish up future earnings worth investors' notice.
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Although most major restaurant chains have reported a marked slowdown in foot traffic over the past month, investors shouldn't necessarily assume that the industry is void of any worthy investment candidates. At least one fast-food enterprise continues to perform in spite of these trying times -- Tricon Global (YUM) - Get Report.

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Tricon Global is the parent organization of three well-known fast-food chains: KFC, Taco Bell, and Pizza Hut. And despite all of the doom and gloom pundits have spewed lately about the restaurant industry, Tricon's stores are doing just fine. In fact, during September, a time President Bush called one of our nation's darkest hours, Tricon posted a respectable 2% increase in same-store sales.

But while I'm impressed with Tricon's recent performance, I'm not here to tout Tricon as a trading opportunity, or a company that's bucking some larger trend. I'm merely point out that this appears to be a terrific entry point for long-term investors.

What's so intriguing about Tricon?

The answer is plenty. In addition to introducing a number of new menu items at each of its concepts during the past year -- Barbeque Wings at KFC, the Big New Yorker Pizza at Pizza Hut and a Chicken Quesadilla meal at Taco Bell -- management has been aggressively promoting each of the brands on television and radio. And it's been actively driving its high-margin franchise business by building new units and selling some of its company-owned stores to franchisees.

But that's not all.

Tricon also bought back $371 million in common stock during the past two years. And under a February 2001 repurchase authorization, the company may buy back another $279 million worth of common stock over the next two years. So management is trying to enhance both earnings and shareholder value.

Speaking of earnings, management has said the company can generate $3.18 a share in 2001. That's 4 cents ahead of the average consensus estimate. As for next year, the sell-side analyst community is calling for earnings in the range of $3.46 a share -- implying an 8.8% rate of growth.

This means that you can buy Tricon for just 13.8 times 2001 estimates, and 12.7 times 2002 estimates. That's pretty darn cheap considering the company has traded anywhere between 8 and 40 times earnings over the past five years, and given the sell side's anticipation that it can grow earnings per share by 14% or greater in a more normalized economy.

All this tells me Tricon is one of the few companies in the restaurant industry that's worth your time and investment dollars. Its potential for future earnings growth and multiple expansion make it simply too attractive to pass up.

And this note:

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In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Curtis welcomes your feedback and invites you to send it to

Glenn Curtis.