3 Reasons Why 2 Billionaire Investors Just Gobbled Down Yum! Brands Shares

NEW YORK (TheStreet) -- Two big-name billionaire investors have taken a big bite out of fast-food operator Yum! Brands (YUM), and there may be more behind the moves than the prospect of increased sales from China.

On Friday, billionaire investor Dan Loeb told investors in his $17.4 billion Third Point hedge fund he has accumulated a "significant stake" in Yum! Brands, which owns Pizza Hut, KFC and Taco Bell. Loeb cited the prospect of Yum! Bands turning the page in China, specifically with fried chicken joint KFC, after a food supplier scare last year crippled sales and profits.

But Loeb isn't the only hedge fund chief to show interest in a Yum! Brands' turnaround. Just days before the widely watched Ira Sohn Conference, where hedge fund managers will pitch their ideas to crowds, CNBC reported Keith Meister's Corvex Capital has taken a meaningful stake in Yum! Brands.

According to the report, Corvex is now one of Yum! Brands' top five shareholders.  Shares of Yum! Brands rose over 5% on the news Friday.

Loeb and Meister may be not be too far off base with their assessment that Yum! Brands shares are undervalued. The involvement of two hedge fund titans could spur internal discussion at the company led by new CEO Greg Creed on how best to more quickly bolster global results. TheStreet reviews three things the billionaire investors may be seeing in Yum! Brands.

1. Better days ahead for KFC China soon.

Loeb and Meister apparently have done their homework and suspect Yum! Brands' share price does not reflect the potential for a savory profit rebound at KFC China this year. At Yum!'s China division, which includes 4,800 KFC locations, same-store sales declined 12% in the first quarter as it continued to deal with a food-quality scare last year that hurt consumer perception of the brand. In 2014, same-restaurant sales in China declined 5%.

But, execs at Yum! Brands have undertaken several measures recently to right the ship in China later this year.

"We launched at the end of March the first of what will be two menu revamps this year -- we'll have eight new products, both for lunch and dinner," said Yum! Brands spokesman Jonathan Blum about KFC China. In addition to traditional products in the chicken category, KFC China will unveil healthier items such as herbal tea and seafood. The new additions to the menu coincide with improving customer perception of KFC China based on Yum! Brands' research, pointed out Blum.

The updated food offerings will join a premium coffee line that was added to KFC China's menu in Shanghai in December. Now available in 10 cities and 1,300 KFC China locations, the coffee is priced at about 40% and 20% discounts to coffee sold at competitors Starbucks (SBUX) and McDonald's (MCD), respectively. "Coffee should add a solid sales layer," noted a Yum! Brands executive on the company's April 22 earnings call.

2. Taco Bell becomes a major player in fast-food breakfast.

Loeb and Meister may see the potential for Taco Bell's breakfast menu to grab serious market share from McDonald's, which is home to the widely regarded Egg McMuffin.

Taco Bell launched its long-awaited breakfast menu nationally on March 27 last year, headlined by the foldable, chewy Waffle Taco and easy-to-hold A.M. Crunchwrap. The breakfast menu, available from 7 a.m. to 11 a.m., has gone onto number 16 items.

The chain, whose fame has always been centered on dishing out tacos and burritos to hungry late-night customers via the drive-thru, recently garnered attention for unveiling four versions of a biscuit taco.  Taco Bell's biscuit taco boasts sausage, eggs and honey dressing wrapped in a folded biscuit. At the same time, Taco Bell has poked fun at McDonald's breakfast standard bearer, the Egg McMuffin, in several high-profile TV commercials.

Breakfast now makes up about 6% of Taco Bell's business, compared with 25% for McDonald's U.S. operation. Consumers' increasing awareness of Taco Bell's breakfast menu, which also includes egg and cheese-filled burritos, helped lead the division to a standout performance in Yum! Brands's first quarter. 

Taco Bell's same-restaurant sales rose 6% for the second consecutive quarter, a solid result that came despite inclement weather and finicky consumer spending patterns, which hurt traffic at restaurants from fast casual Chipotle (CMG) to sit-down eatery Buffalo Wild Wings (BWLD).

3. Pizza Hut's new, hipster, higher-priced menu finally attracts bigger crowds.

Pizza Hut represents about 60% of Yum!'s 13,000 plus total units.  Yet, despite its heft the division has underperformed amid subpar menu, marketing and ruthless price competition.

Loeb and Meister may sense that Yum! Brands's new menu of artisanal pies and sauces for Pizza Hut launched last November, along with better marketing, may lift results beyond this year.

Pizza Hut served up a 1% same-restaurant sales decline in the first quarter. Last year, sales dropped 3%. Execs said the company's earnings call they believe sales at Pizza Hut "could remain soft" in the near-term.

"Unfortunately, we haven't been as effective as we'd like with our marketing," said Blum. "Frankly, our competitors have just done a better job at differentiating themselves and their offerings."

Domino's Pizza (DPZ) is one of those competitors.  The pizza chain continues to have sales success as it has aggressively marketed its online and mobile ordering platforms. What makes the sales even more impressive is that unlike Pizza Hut, Domino's menu has largely stayed the same over the past two years. Sales at Domino's Pizza in the U.S. increased 7.5% in 2014.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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