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The Ravenous Emerging Consumer
Investors in America’s leading fast-food companies have benefited from excellent price appreciation, as well as dividend growth over the past 10 years, as consumers in emerging markets have provided a vast source of steady, profitable expansion.
Yum! Brands, Inc. (YUM), operator of fast-food chains, such as KFC, Pizza Hut, and Taco Bell, has been an excellent performer over the past 10 years. From a 2002 low of $10.20, the share price has climbed steadily, reaching a recent price of around $65 a share. Meanwhile, the dividend payout, has climbed dramatically in the past five years. With its low capital needs relative to its surging cash flow, the company likely earned a return on shareholder’s equity of over 80% in 2012.
The company has benefited tremendously from international expansion over the 10-year stretch, as it went from earning the vast majority of its revenues in the U.S. market in 2002, to getting only about a quarter of its revenues domestically in the first three quarters of 2012.
Yum! now boasts about 14,200 restaurants in its International division, mostly franchised, as well as a China division of around 4,500 restaurants, which are mostly company owned. The China division now makes up the largest portion of revenues and operating profits, due to Yum!’s emphasis on company owned restaurants in that country, as well as the breakneck growth of that nation’s middle-income citizenry. The company got into the China market early and bet big, a decision that has created exceptional returns for shareholders.
McDonald’s Corporation (MCD - Free McDonald's Stock Report) has had an excellent 10-year run as well, with MCD shares rising from a 2002 low of $15.20 a share to about $90 recently. In the same period, the dividend payout rose from $0.24 a share to $2.87 a share, marking an annual growth rate of 26%.
Much of the company’s success has come from the increasingly global mix of its sales. The company divides its businesses into four main segments: the United States, Europe, Asia/Pacific/Middle East/Africa (APMEA) and other countries & corporate. The U.S. segment, which accounted for the largest share of revenues and the vast majority of total operating income in 2002, now accounts for less than a third of revenues and less than half of total operating income.
In contrast, the APMEA division has, in recent years, grown its revenues from about $2.4 billion in 2002 to more than $6 billion in 2011. More impressively, its operating income of $64 million in 2002 expanded to a staggering $1.5 billion in 2011. Since establishing its first restaurant in Mainland China in 1990, the chain has expanded rapidly, and is on track to reach its goal of 2,000 restaurants in the fast-emerging economy by the end of 2013. Indeed the company added about 250 new China locations in 2012 alone.
Surprisingly, Europe has become a far bigger portion of McDonald’s business as well. Its revenues of $5.1 billion in 2002 more than doubled to $10.9 billion in 2011, making it the largest segment by this category, beating the U.S. division by about 28%. Some of the chain’s European success has come from an overhaul inspired by the realization that, as opposed to U.S. customers, who tend to seek speed and convenience from chain restaurants, European consumers prefer a more leisurely dining experience. The upgrades have included wireless Internet connections in many of Europe’s outlets and an increased emphasis on aesthetically pleasing store design. However, another large contributor has been the addition of stores in Russia and Eastern Europe, regions that had largely been off-limits to American restaurant chains before the fall of communism. McDonald’s opened its first outlet in Russia in 1990. Since then, Russia’s market has expanded to almost 300 restaurants, with dozens now being added each year and a target of growing its store count by about 15% per year. In addition, customer volume per store in Russia has become far higher than that in the United States.
While Yum! and McDonald’s have already broken into the biggest potential markets, there is still a lot of room to grow. India, with a population that is projected to eventually outstrip even China’s, lags far behind in terms of this sort of market penetration. Further, while economic growth in emerging economies has outpaced the developed world in recent years, hundreds of millions are still clamoring to join the nascent middle class. With exceptional long-term growth potential, investors would be wise to take notice of these market-leading companies.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.