Chain of restaurant operator Yum! Brands Inc. (YUM) will report its fourth quarter earnings results on February 6, after the market closes. The company's earnings performance will be largely guided by its operations in China and emerging markets.
The company is already having close to 4,200 restaurants in about 700 cities in China and plans to open another 600 in 2012. Yum will also be adding 130 new stores in Africa. KFC alone operates about 3500 restaurants in the second largest economy of the world. Yum had generated operating profit of $755 million in 2010 from China. At least 36 percent of International revenue came from China in 2010 and the expectation in the industry circle is that it could be more than 40 percent in 2011 and may reach 50 percent in 2012.
Interestingly, Yum! Brands' KFC and McDonalds fast foods are now increasingly facing competition from domestic companies. But the market seems to be growing thereby offering opportunities to more, but the biggies are eyeing for a better share. This could result in slow down in growth for Yum Brands. The company is projected to see a growth of around 23 percent in 2011 compared to around 32 percent in 2010.
Currently, Yum seems to be dependent more on China for growth engine. The weakness in back home would likely to continue to hurt its performance.
Expectations
Wall Street analysts are expecting the Louisville, Kentucky-based Yum! Brands to report earnings of 74 cents a share on revenues of $4.03 billion for the fourth quarter. This represents earnings growth of 17.5 percent on revenue upside of 13.2 percent.
The company earned 63 cents a share on revenues of $3.56 billion in last year.
Third Quarter Results
Yum Brands reported net income of $383 million, up 7.3 percent from $357 million and earnings grew 8 percent to 80 cents a share from 74 cents a share in the year-ago quarter. Excluding any adjustments, earnings would have increased 13.7 percent to 83 cents a share from 73 cents a share in the year earlier quarter.
Total revenues grew 14 percent to $3.27 billion from $2.86 billion in the previous year quarter. Analysts had predicted the company to earn 83 cents a share on revenues of $3.10 billion.
Earnings History
In the last four quarters, Yum Brands' earnings failed to meet analysts' expectations during the first quarter of 2011. In the third quarter, the company's earnings met with expectations and in the second quarter of 2011 and fourth quarter of fiscal 2010, it topped estimations. The company earned 83 cents a share, 66 cents a share, 63 cents a share and 63 cents a share during the last four quarters.
On the top line side, the company generated revenues of $3.27 billion, $2.82 billion, $2.43 billion and $3.56 billion in the last four quarters.
Analysts Take
While seven analysts recommend Yum shares as Strong Buy, seven others rate the stock as Buy. Six analysts recommend the stock as Hold, whereas one analyst rates the stock as Underperform.
Versus Peers
Yum's gross margin for the trailing 12-month period is 26.87 percent compared to industry average of 30.4 percent and McDonald's 39.57 percent. Operating margin of 15.87 percent is healthier than industry average of 7.68 percent, but weaker than McDonald's 30.71 percent.
iStock Punch
The company's performance is dependent on international operations, especially China. There will not be much of a problem in the immediate term. But if the company fails to extend its presence, then it could pose bigger challenges in the long run. Gross margin should also be addressed. Yet, the stock looks attractive given its focus on international markets.