Earnings Sneak Peek: Is YUM! Brands Still Hot and Fresh?

Yum! Brands (YUM) is scheduled to serve up its earnings after closing bell on Tuesday, October 5, 2010. Since being founded in 1997, Yum! Brands has found worldwide success with quick service restaurants such as Pizza Hut, KFC, and Taco Bell. In 2010, investors have seen the share price heat up from $34 to an all time high of $46. Is Yum! Brands ready to feed the world and investors as it continues to expand its international presence?

The Kentucky based company is prepping Wall Street for continuing hot earnings. Last quarter, the 2010 EPS was raised from $2.39 to $2.43 (excluding special items). The company also has restaurants in over 110 countries and counting. Last year, it opened more than 500 new restaurants in China, the world’s fastest growing economy.

Yum! Brands has a long term goal of 20,000 restaurants in China. Someone has to feed the rising economies, and McDonald’s can’t do it alone. While McDonald’s (NYSE: MCD) has its firm place as a burger joint, Yum! Brands is better diversified with Pizza Hut, LJS, KFC, Taco Bell, and even AW. Furthermore, The Hut is the number one casual dining brand in China.

News on YUM! Brands has been relatively quiet. It only received one upgrade from neutral to buy this year (UBS in March), and no downgrades. Analysts are expecting Q3 earnings between .69 and .74 per share. Going back to Q2 2009, YUM! Brands has beat estimates every time.

Total revenues increased from $2,476 million in Q2 2009 to $2,574 million in Q2 2010. Although domestic operations are luke warm with high US unemployment and price competition, emerging economies look appetizing. China isn’t the only emerging middle class on the menu. By 2015, Yum! Brands expects profits in India to reach $100 million. In 2006, about 30% of overall operating profit came from emerging markets. Since then, it has grown to about 45%, and is expected to reach 60% by 2015.

Going forward, investors need to watch rising labor costs. CFO Richard Carlucci had the following to say: “We now expect very high labor inflation for the second half of the year.” The first half of 2010 already came with a $12 million rise in labor cost. However, higher wages may benefit the company as consumers enjoy the simple luxury of dining out.

If you’re looking for a way to feed your portfolio, as well as the world, consider picking up some shares, especially if labor inflation remains in check. If earnings don’t sit right with Mr. Market, consider washing it down with a nice 2% dividend that Yum! Brands currently offers.

Disclosure: The author does not own any shares mentioned above.