"Yum! Brands, Inc. is gearing up for a major expansion in India early next year, where the restaurant chain hopes to position KFC and Taco Bell as youthful, hip brands in a nation of young consumers. Yum's India push will put it in a race for appetites of consumers in one of the world's most populous countries. Yum currently lags its big U.S. rivals. It operates 72 KFCs in India, compared to McDonald's Corp.'s 170 outlets. It has 158 Pizza Huts there will Domino's Pizza Inc. has 274 stores. Yum plans a total of 1,000 restaurants in India by 2015, generating about $1 billion in annual revenue. "Our goal is to get India on the same growth trajectory we've had in China," where Yum now operates 3,500 restaurants, Yum CEO David Novak said in an interview. China will deliver a third of Yum's projected $1.54 billion in operating profit this year."
So that was all about major expansion plans in India. Regarding growth in China, here is an excerpt from Credit Suisse note issued on Feb 1 (also see the attached chart):
"YUM is returning to favorable demand-cost dynamic. The Chinese food PMI dipped from all-time high in Dec. (down 3.0 to 59.8) while food inflation slowed dramatically (down 11.5 points to 11.0). Slowing inflation may reduce the urgency for additional price increases, which should provide corresponding benefit to comps; however, rising wages (trending up 5%-10% YoY in Jan) and strong demand can still support pricing, and CPI data shows that the industry has already returned to taking price. We see upside potential to 4Q China comps. Our DCF-supported $41 price target is based on 15x-16x multiple which is comfortably conservative relative to peer group average multiple of 17x."
From technical standpoint, the stock has been trading in a very tight range of $32.50 and $36.50 for nine months (see attached chart). Given the positive story about India and China above, I think there is a potential the stock could breakout to the upside after earnings on better guidance/outlook. I like the following vertical call spread going into earnings:
- Buy to open April $36 calls
- Sell to open April $39 calls
This $3 spread is going for a net debit of $1.05. I want to do this in April because yesterday there was active call buying at $36 strike and the total volume was greater than 1.5x open interest. I like the odds. The P&L chart is also attached.
Good luck!
