Yum! Brands Wants to Give Its Shares Muscle With New Protein Menu

NEW YORK (TheStreet) – Yum! Brands (YUM) knows the definition of good eating.

The company whose restaurants include KFC, Pizza Hut and Taco Bell, among others, has fed Americans for many decades. But it's been the stock that has done most of the feeding lately, satisfying investors' appetites for profits.

Over the past eight months, shares are up almost 30%. With the stock closing Monday at $83.29, Yum! has provided year-to-date gains of over 10% compared to the industry's 3.27% gain.

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With the company's new restaurant initiatives that focuses on healthy doses of protein, investors may need to make room for their future cash as they fill their bellies. There are no signs that Yum! plans to slow down, which is not good news for Chipotle Mexican Grill (CMG).

Never shy about menu tinkering, Yum! said it will introduce a Cantina Power Menu beginning Thursday at its Taco Bell restaurants. It's only been a couple of months since Taco Bell began serving breakfast. After its trial run of the menu last year, offering chicken and steak burrito bowls proved to be successful. Bringing it nationwide was a logical next step.

The way I see it, this new protein menu is really being introduced for two reasons. First and most obvious, Yum! wants to capitalize on the popularity of all-things protein. The second reason and perhaps most tactical, it's a not-so subtle attack on Chipotle's strong grip on protein.

Chipotle, which has been credited with perfecting this restaurant concept, has demonstrated that this model can work. Offering a wide range on menu items using only a small list of ingredients has delivered strong operational results. Panera Bread (PNRA) has attempted a similar model only to yield mixed results.

For Yum!, which has a strong global reach and more pricing power than Chipotle, it's not a matter of "if" its protein menu will work. The company already has a strong grasp on what its customers want. The question is, how much profit should investors expect and to what extent it can damage Chipotle?

In a recent conference call with reporters, Brian Niccol, Taco Bell’s coon-to-be CEO said,

“People are not looking for diet food. What they are looking for is food that gives them energy, food that’s going to give them freshness, food that’s going to give them the protein.”

With the new crave in protein shakes and the growing popularity of Greek yogurt, Niccol is on to something. But protein, which includes steak, chicken and pork, is not cheap.

Chipotle has had to raise its menu prices to offset the rising costs of beef and chicken. McDonald's (MCD), which once seemed impervious to such macro issues, decided to remove its Angus third-pounder from its menu. McDonald's saw no cost-benefit in selling the burgers that didn't grow the bottom line.

That won't be the case for Taco Bell.

The Cantina Power Menu, which will offer double portions of meat, will be priced at $3.79 for a chicken burrito and $5.19 for a steak bowl. Both are more expensive than items on Taco Bell's regular menu. At the same time, these are cheaper than buying at Chipotle, whose comparable menu items have always been priced at a premium. But Chipotle is growing revenue at a 24% rate and delivering 37% in gross margin.

Yum!, which is double the size of Chipotle, won't need that level of growth to deliver the sort of profits to drive the stock higher. In the April quarter, Yum! delivered a 24% jump in profits on just 8% year-over-year revenue growth. And that was with a weak performance at Taco Bell.

It remains to be seen how quickly the protein menu takes off. We'll find out one way or another -- either through Yum!'s results or Chipotle's. Granted Chipotle has aggressive store expansion plans but its restaurant aren't yet everywhere.

Yum!, on the other hand, which benefits from its dual restaurant concept (e.g. Taco Bell sharing restaurant space with KFC), can reach more people in more ways.. In either case, I can't bet against Yum! The food's delicious and, unlike Chipotle, Yum!'s stock is still cheap.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates YUM BRANDS INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate YUM BRANDS INC (YUM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in stock price during the past year, increase in net income, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 7.3%. Since the same quarter one year prior, revenues slightly increased by 7.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Hotels, Restaurants & Leisure industry average. The net income increased by 18.4% when compared to the same quarter one year prior, going from $337.00 million to $399.00 million.
  • Net operating cash flow has increased to $570.00 million or 42.14% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -3.17%.
  • 37.19% is the gross profit margin for YUM BRANDS INC which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 14.64% trails the industry average.

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