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Yum! Brands (US) Builds on International Success

07 Oct 2010 - Taco Bell, Pizza Hut and KFC aren't obvious candidates for this decade's big growth story. But they show precisely why investors need to think outside the U.S.

The restaurant chains' parent, Yum Brands, reports third-quarter earnings Tuesday. For a company whose brands are so distinctly American, its results are likely to show a business that is increasingly international and, specifically, Chinese. Sales at China locations open a year or more are expected to rise about 5% during the quarter, according to analysts, compared with 1% to 2% growth at U.S. locations.

That should push Yum one step closer to a turning point, likely to be reached sometime next year, at which more of its revenue comes from China than the U.S. Deutsche Bank analyst Jason West expects the company will fall just shy this year, with China contributing 36% of Yum's estimated $11.2 billion in revenue, compared with 37% from the U.S. Locations across 100-plus other countries contribute the rest. Within five years, Yum is expected to generate twice as much revenue from China as it does from the U.S.

More broadly, Yum reflects a shift in consumer-spending growth away from Western economies toward Asia and Latin America. Consumer spending across emerging markets is expected to increase by about 6% this year and next, says HSBC, compared with 1.4% in the developed world. The transition of those nations from export-led growth toward consumer-driven economies bodes well for retail and restaurant demand.

And yet there are relatively few large, publicly traded U.S. companies poised to take immediate advantage. McDonald's rivals Yum for international exposure, although Brockhouse Cooper analysts note only about 20% of revenue comes from the fast-expanding Asian-Pacific region. Rival Burger King was just taken private. That basically leaves investors with Starbucks and Domino's Pizza, says Barclays Capital analyst Jeffrey Bernstein. Both have smaller, albeit still formidable, overseas operations.

Little wonder that Yum is up more than 30% this year, while the S & P 500-stock index has risen just 2%. And at 16.7 times estimated 2011 earnings, compared with a multiple of 15.3 times for McDonald's, the stock isn't cheap. But that premium doesn't look too rich given that Yum's long-term, global growth prospects look tasty indeed.
WSJ

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