Here’s a Low-Risk Trade to Make 21%
Although Chinese “A” , shares of mainland China-cased companies, are generally restricted to its own citizens, there are still many ways to invest in China. You can buy companies that mine raw materials like copper or drill for oil, two commodities for which the Chinese economy has a rapacious demand. You can also invest in a closed-end fund such as the Morgan Stanley China Fund (NYSE: CAF).
Or you can buy an stock that opened 500 new restaurants in China in 2010 — 36% of its total global expansion.
What’s the name of this stock? Here are some clues…
This food company was spun-off from PepsiCo (NYSE: PEP) in 1997. By 2010, the company was opening an average of four new restaurants a day worldwide.
This Louisville, Ky., firm is the of some of the world’s largest restaurant chains, with nearly 38,000 outlets in more than 110 countries across the globe.
The company I’m referring to is YUM! Brands (NYSE: YUM).
YUM!’s brands include KFC, Taco Bell, Pizza Hut, Long John Silver’s and A&W.
The company plans to divest its interest in A&W and Long John Silver’s and instead focus on developing its core brands, especially KFC, in China. That decision is likely to boost revenue and .
Of the nearly 1,400 new KFC restaurants opened in 2010, more than 500 of them, or 36%, were located in mainland China. This growth brings the number of KFC restaurants in China to more than 3,000. However, YUM projects demand could easily lead to 15,000 new KFC restaurants being opened in China in the coming years. In fact, KFC is so popular — and so profitable — in China, that the company often earns back its capital investment in less than three years.
YUM is also achieving international growth by co-branding its restaurants, opening one location housing two outlets, such as a combined KFC/Taco Bell. This strategy is helping the company increase sales and distribution points without the added cost of opening two separate storefronts.
And because independent franchisees own and operate the bulk of these restaurants, the company maintains steady without having to invest in major capital or operations management expenses.
Despite food rising and costs, YUM is seen as being well-positioned to manage food costs because, unlike smaller companies, it is able to lock-in future food purchases. As such, the company has a key strategic advantage in the fast food industry.
Technically, YUM appears strong. The stock is in a Major uptrend and is again approaching its all-time high of $53.19, hit in late February 2011.
For just over a year, from mid-February 2010 onward, the stock has been in an accelerated uptrend.
In late-August 2010, the company surpassed old resistance, which has become new support, near $42.50, bullishly completing an ascending triangle pattern. The stock is now in a second ascending triangle pattern, formed by the accelerated uptrend line and resistance at $53.19.
If the stock can surpass this point, there would no historical resistance in sight — and YUM could soar.
The measuring principle for a triangle projects a price target of at least $63.88 ($53.19 – $42.50 = $10.69; $10.69 + $53.19 = $63.88).
From a fundamental standpoint, YUM shows excellent growth potential.
Full-year 2010 revenue increased 4.6% to $11.3 billion, from $10.8 billion in 2009. Growth was largely driven by a 17% sales increase in China, the company’s most profitable market.
YUM will report first-quarter 2011 results on April 11. Analysts expect revenue will increase 1.9% to $2.4 billion, from $2.3 billion in the year-ago quarter, due to continued expansion in China.
For the full 2011 year, analysts’ project revenue will increase 3.9% to $11.8 billion. As the company continues to expand internationally, revenue is expected to rise a further 5.5% to $12.4 billion, by 2012.
The earnings outlook is equally bright.
Full-year 2010 earnings were up 12.6% to $2.53 a share, from $2.25 the previous year. The increase was achieved through a combination of sales growth, higher profit margins and an aggressive share buyback program. In 2010, YUM repurchased 9.8 million outstanding shares, maintaining its goal of reducing outstanding shares by at least 5% each year. In January 2011, YUM announced it will repurchase another $750 million in outstanding shares in the next year and a half.
For the first-quarter of 2011, analysts project earnings will rise 8.5% to $0.64, from $0.59 in the year-ago quarter.
For full-year 2011, earnings are expected to rise 12.7% to $2.85. With continued expansion in China, analysts project further earnings growth of 12% in 2012, with earnings reaching $3.19.
Although YUM does have a high debt load of $3.6 billion, compared to $1.4 billion in cash, this is due to aggressive expansion in China and will likely be reduced in the years to come.
On March 25, the board of directors confirmed its $0.25 dividend, meaning YUM now offers an annual forward dividend of about 1.9%. This yield is also likely to increase over time, as the company has raised its dividend every year since it was initiated in 2004.
Action to Take –> With a solid dividend, strong fundamentals and bullish technicals, YUM currently looks appealing. Despite rising food costs and the company’s already dominant global presence, YUM appears to still have substantial room to grow, especially in China, making the stock an attractive long-term investment.
I think traders can expect YUM to reach its $63.88 target, set by the formula above, giving the stock more than 21% upside from the breakout level with little risk.