Which Western food brand is most dominant in China? It’s not Coca-Cola (NYSE: KO) or Pepsi (NYSE: PEP). It’s fried chicken sold by KFC.
KFC, operated by the multi-national fast-food company, Yum! Brands (NYSE: YUM), is a force to be reckoned with in China.
In fact, YUM currently is the country’s leading retail developer.
Of YUM’s 38,000 restaurants, nearly 15% are in that nation.
Having established a strong beachhead in China, the fast-food empire — which also operates Pizza Hut and Taco Bell — Yum has embarked on its next big conquest: India.
India is the world’s second most populous country, after China. According to the World Bank, its economy is expected to grow 6% in the coming year.
Currently, there are about 500 Yum-branded restaurants in India. About 100 of these were opened in 2011. By 2015, Yum plans to invest $100 million to start at least 1,000 total restaurants in that nation. Over the past three quarters, sales in India have been in the strong double digits. Yet, Indian sales still account for less than 1% of the company’s total global revenue. These figures point to huge growth potential.
Shareholders seem pleased by the strong growth outlook.
For the past two and a half years, the stock has been on a major uptrend. During this time, shares have risen more than 132%, from the February 2010 low of $30.92, to current levels near $71.
The stock shows no sign of slowing down. Shares look to be on the verge of bullishly breaking a “W-shaped” consolidation pattern, which could be seen as a double-bottom within a larger rectangle.
This pattern began in early April 2012, after shares hit a multi-year high of $73.73. Unable to maintain upward momentum, the stock fell sharply over the next month, hitting a low of $61.77 by early May. Shares continued to bounce up and down off this support level for much of the summer. The stock peaked at $68.31 in late July before retreating back near $62 support by early August.
At that time, the major uptrend line intersected around $62. The fact that support held was significant as it shows the stock’s underlying strength. Since touching the August low, shares have been slowing climbing higher. They’re now re-approaching $73.73 resistance. If this resistance level can be successfully challenged, the stock would bullishly complete the rectangular consolidation pattern.
According to the measuring principle for a rectangle — calculated by adding the height of the pattern to the breakout level — shares could potentially reach a new price target of $85.69 ($73.73-$61.77 = $11.96; $11.96+$73.73 = $85.69). At current levels, this target represents about 21% returns.
This bullish technical outlook is supported by strong fundamentals. On Oct. 9, the company reported upbeat third-quarter results.
Revenue for the period rose 12% to a record $3.7 billion, compared to $3.3 billion in the comparable year-ago period. Growth was primarily driven by soaring demand in China. Sales in China increased 22% from the year-earlier period, and same-store-sales in China increased 6% from the comparable year-earlier period. At the same time, 192 new Yum brand restaurants opened in the country.
For the full 2012 year, management hopes to open 750 new Yum-brand locations worldwide — a record number. Analysts’ project full-year revenue will increase 9.5% to $13.8 billion, from $12.6 billion last year.
The earnings outlook is similarly strong. Driven by strong demand in China, third-quarter earnings (excluding special items) rose 19% to $0.99, from $0.83 in the comparable year-earlier period.
Due to international expansion, management expects full-year 2012 earnings to increase 13% to $3.24, compared to $2.87 last year. If this target is reached, it will be the 11th consecutive year earnings have increased by 13% or more.
In addition to a strong growth outlook, the restaurant chain pays a reasonable dividend of $1.34 per share, which works out to a yield of about 1.9%. This yield is steadily increasing. Management recently raised the payout by 18%, marking it the eighth consecutive year of double-digit dividend increases.
Action to Take: Based on the analysis above, here’s how I plan to trade YUM:
- Set buy stop order on YUM at $73.76, good until Friday, Nov. 16
- Set stop-loss at $64.39, slightly below support
- Set initial target at $85.69
- Risk/reward ratio is 1.27:1
– Dr. Melvin Pasternak
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Source: Trade of the Week