The past weekend's
news that China will
allow its
currency, the yuan,
to appreciate against
the dollar sent positive
waves through the market
for much of Monday's
trading session.
Aluminum and steel
stocks
were up, as were
domestic consumer plays
in mainland China. But,
as StreetAuthority's
David Sterman
mentioned, it may
take years before the
benefits are realized.
That's why it's
important to take a step
back. Rather than using
the weekend's news as
the sole reason to buy a
particular stock,
investors should use it
as one more reason to
buy shares of companies
that will capitalize on
catalysts that are
already at work -- and
will be for years to
come.
The biggest and yet one
of the least
talked-about stories
related to China is its
emerging middle class.
Chinese officials worry
about having to rely on
American and European
consumers to grow their
economy -- rightly so,
considering recent
economic crises. It's in
China's long-term
interest to have a
stronger currency,
rising wages and at
least a partial social
safety net so its
citizens will be
encouraged to save less
and spend more.
Fact: China already has
a middle class of about
300 million people. That
number is expected to
exceed 500 million in 10
years.
Some more interesting
facts: Nearly one new
Kentucky Fried Chicken
fast food restaurant
opens in China every
day. There are almost
4,000 KFC locations in
China, compared to only
about 1,100 McDonald's
locations. Soon, there
will be more KFCs in
China than in the United
States.
And that's not all that
KFC parent Yum Brands
(NYSE: YUM) has been
up to. . .
The company opened more
than 1,400 new
restaurants around the
world in 2009 -- 509 of
those were in China. Yum
operates and franchises
the KFC, Pizza Hut and
Taco Bell brands, among
others, and now has
nearly 35,000 locations
worldwide.
Yum isn't just a global
play with a partial
China angle -- it has a
major footprint in the
country. And there's
good reason behind the
aggressive expansion in
China -- 34% of Yum's
2009 revenue came from
its Chinese locations,
despite having just over
10% of its total
locations in the
country.
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The average Yum fast
food location in China
carries margins of more
than 20%, according to
its most recent
annual report, and
can achieve "cash
payback" within two to
three years.
The global recession
caused Yum's same store
sales to be flat, except
in China, where sales
grew +10%. Profits from
Chinese operations were
up +29% in 2009 after
growing +28% in 2008.
The entire company
carries an
operating margin of
14% -- not bad for the
restaurant business. The
global slowdown didn't
hurt Yum too bad either.
In fact, earnings per
share grew by +13% in
2009.
Yum believes its brands,
particularly KFC, can be
as prevalent in China as
McDonald's (NYSE: MCD)
is in the United States.
The company has been
generous to
shareholders, having
paid $8 billion in
dividends and share
repurchases since it
spun off from PepsiCo
(NYSE: PEP) in 1997.
And speaking of
McDonald's, Yum's stock
has outrun its
golden-arched rival
during the past 10 years
with a gain of +640%
compared to +160%.
Action to Take -->
Yum has ambitious goals
for China. Given its
success so far, there's
no reason to doubt
that's possible. At less
than 19 times earnings,
the stock is reasonably
valued on both a
historical basis and
compared to its peers,
considering its
long-term potential for
global growth.
The stock's 2% yield may
not seem appealing at
first, but consider that
this is still a company
that is expected to grow
+12% annually during the
next five years. The
dividend has grown
about +33% during the
past five years, yet the
company still pays out
about 35% of earnings.
Don't be surprised to
see a steadily rising
dividend, especially
once management feels it
has reached its
potential for expansion.
