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Yum! Brands (YUM) Sees a Strong Bounceback in 2014

Tickers in this article: YUM

NEW YORK ( TheStreet) -- Ahead of its annual investor meeting on Wednesday, Yum! Brands  provided full-year estimates which left much to be desired. However, a comeback next year could see the company hit its stride.

The owner of KFC, Pizza Hut and Taco Bell said it expects full-year 2013 earnings to see a high-single to low-double digit decline from a year earlier. In 2014, though, the company expects earnings-per-share growth of 20%.

"We expect to have a strong bounceback in 2014 following a year that is clearly below our high expectations. In China, we have an aggressive plan to reignite sales at KFC and we expect continued strong performance at Pizza Hut Casual Dining," said CEO David C. Novak.

Yum!'s division in China, which is the company's largest market, has been suffering recently as operating profit dropped off on fears surrounding an avian bird flu crisis in Hong Kong and China. As a result, Hong Kong instituted a public health alert and temporarily banned the import of live chickens from the mainland.

November same-store sales in China increased a meager 1%. KFC sales came in unchanged, despite a 16% increase over the first 10 days of the month thanks to a half-price chicken bucket promotion. For the remainder of the month, same-store sales were down 8%.

As the division recovers, Yum! predicts operating profit to grow at least 40% over 2014. A recovery in the division is crucial given China accounts for half of Yum's total operating profit.

The company expects to open at least 1,850 new restaurants outside the U.S., strengthening its leadership position in emerging markets. Of the new restaurant openings, Yum! will open 700 in China and 150 in India. At the end of the third quarter ended Sep. 7, Yum! had 4,500 KFC outlets in China.

Shares were down 2.5% to $75.78 on Tuesday. Year to date, the stock is up 13.1%.

Despite the troubles the company is facing, TheStreet Ratings team rates Yum! Brands Inc as a Buy with a ratings score of B. The team has this to say about its recommendation:

"We rate Yum! Brands Inc (YUM) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strongest point has been its expanding profit margins. We feel these strengths outweigh the fact that the company has had subpar growth in net income."

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

  • YUM, with its decline in revenue, slightly underperformed the industry average of 0.7%. Since the same quarter one year prior, revenues slightly dropped by 2.9%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • Yum! Brands Inc has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, Yum! Brands Inc increased its bottom line by earning $3.37 a share vs. $2.74 a share in the prior year. For the next year, the market is expecting a contraction of 13.8% in earnings ($2.91 vs. $3.37).
  • The gross profit margin for Yum! Brands Inc is currently lower than what is desirable, coming in at 33.15%. YUM has continued with the weak profit margin when compared to the same quarter of last year. Despite the mixed results of the gross profit margin, the net profit margin of 4.38% trails the industry average.
  • Even though the current debt-to-equity ratio is 1.34, it is still below the industry average, suggesting that this level of debt is acceptable within the Hotels, Restaurants & Leisure industry. Despite the fact that YUM's debt-to-equity ratio is mixed in its results, the company's quick ratio of 0.55 is low and demonstrates weak liquidity.

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