YUM Brands Reports Strong Growth in China

YUM Brands reported second quarter 2011 results after the market closed today that exceeded Wall Street’s expectations. Revenue came in at $2.8 billion well ahead of Wall Street’s consensus estimate of $2.6 billion. Earnings per share came in at $.66. That was up 13% from last year and $.05 above the Street’s expectations.

 

Key Highlights

In our YUM Brands earnings preview we were concerned that domestic weakness would offset the global growth the company is experiencing in China. Operating profit in the U.S. did decline 28 percent, but profits were up 25 percent in China and 11 percent internationally.

 

The international growth story appears to be intact for YUM Brands with 241 new restaurant openings. That led the company to increase their EPS growth forecast to 12 percent in 2011.

 

David C. Novak, Chairman and CEO said, “”We delivered EPS growth of 13% in the second quarter as strong performance in China and other emerging markets, combined with the benefit of a lower tax rate, offset a very disappointing quarter in the U.S.”

 

Earnings Analysis

The second quarter results reinforced the fact that YUM Brands remains a strong China play. Sales in China were up 28 percent and the company opened 99 new stores there in the second quarter.

 

Share Performance

In after hours trading, YUM Brands’s shares were up 3 percent to $58.85 following the strong earnings report. We expect the stock to hold those gains going into trading tomorrow.

 

Valuation

YUM Brands shares are now trading at 17x consensus 2012 EPS estimates. That is above the relative valuation of their peer group. However, YUM’s earnings estimates will undoubtedly be raised and the stock will likely hit a new 52-week high tomorrow.

 

Recommendation: Buy with a $60 price target.

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