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Whale Watching: Bill Ackman thinks that YUM is YUCK



August 17, 2010 – Comments (10) | RELATED TICKERS: YUM , PZZA , DPZ

In my next whale watching post, I want to take a look at Bill Ackman's Pershing Square Capital. One interesting move that he made during the quarter is bidding adieu to a huge chunk of his stake in Yum! Brands (YUM), selling 13.3 million shares of his 15.2 million share position during Q2.

Pershing Square: Held 1.9 Million Yum Brands Shares At June 30 Vs 15.2 Million

I realize that a huge number of hedge funds and mutual funds own stakes in Yum as a play on the company's rapid growth in emerging markets, like China, but I personally have never gotten this investment.

First of all, the company's three restaurant franchises, KFC, Taco Bell, and Pizza Hut suck. I used to eat Taco Bell and Pizza Hut back when I was in college many moons ago, but I wouldn't touch them with a ten foot pole today and I'm hardly what one would call snobby. I'll gladly eat Mexican food at Chipotle (CMG), Baja Fresh, or Qudoba (JACK)...but Taco Bell is the bottom of the barrel. It's food is cheap, but it's low quality and terrible for you.

The food is even worse at Pizza Hut. Good pizza places are a dime a dozen. Why would anyone order pizza from Pizza Hut? I realize that things are a little different in certain parts of the Midwest, but here in the East there's an awesome Mom and Pop pizza joint on every corner. Heck even the lowly Papa Johns (PZZA) and Dominos (DPZ) have better pizza than the Hut. I think that they put a full gallon of oil in each one of their pan pizzas.

This brings us to what I consider to be the crown jewel of the restaurant empire formerly known as Tricon, KFC. Unlike most people that I know, I actually kind of like the food at Kentucky Fried. I suppose that it stems from my fond memories of taking a basket of KFC on picnics with my family when I was young. KFC's food is tasty, but it again is pretty bad for you. I must be getting old because I'm at the age where I care about such things, that and the fact that I've already had a bypass make me, well bypass going to KFC on a regular basis.

While I was reading BusinessWeek magazine this week, I came across a story about just how messed up things are at KFC in the United States right now. It's not pretty:

Why KFC Franchisees Are Squawking

KFC Sued for Ads Touting Grilled Chicken Over Crispy

KFC Fails to End Suit Over Chicken-and-Sides Coupons Pitched on Oprah Show

Yum!'s international operations seem to be run well, but domestically this does not sound like a well-run company at all. Yum has been smart to emphasize international growth, because its same store sales are falling quarter, after, quarter, after quarter here. I must say though, no wonder everyone seems to hate Americans if this is the sort of food that we're selling to them ;). I kid, I kid...somewhat.

Yes YUM pays a dividend, though at a little over 2% it's nothing to write home about. Yes YUM has great exposure to emerging markets, sales there represent nearly half of the company's operating profits today. YUM's return on invested capital leads the industry. Still, I just am not quite sure that I get it. 18.5 times trailing earnings for a company that aims to grow EPS at 10% per year just seems a little expensive to me. Perhaps that's what Ackman was thinking as well. Or perhaps he just found another idea that he like better and decided to reallocate his funds.

Is there anyone out there who lives abroad or who has been to a number of different countries can provide some feedback on what foreigners think about Taco Bell, Pizza Hut, and KFC. I'd love to hear what people in China or Brazil think about Yum!'s stable of brands. How long do you think it will be before foreigners realize that these restaurants' food is terrible? 


10 Comments – Post Your Own

#1) On August 17, 2010 at 11:17 AM, Pick1es (25.78) wrote:

went to a KFC and Pizza Hut in New Zealand; it tasted exactly the same as they do in the US. Never been to one in China or Brazil though.


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#2) On August 17, 2010 at 11:20 AM, portefeuille (98.91) wrote:



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#3) On August 17, 2010 at 12:01 PM, TMFDeej (97.48) wrote:

for·eign·er (fôr -n r, f r -). n. 1. One who is from a foreign country or place.

YUM is a U.S.-based company, so a "foreigner" would be someone who is not currently living in the United States.


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#4) On August 17, 2010 at 12:11 PM, catoismymotor (< 20) wrote:

YUM is the nutritional version of Altria. I can't bring myself to own it because of the same reasons you listed.

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#5) On August 17, 2010 at 12:15 PM, KurtEng (31.07) wrote:

I'm highly offended that you say Taco Bell sucks.  Sure, the food is low quality and even the Pepsi tastes worse there than anywhere else, but somehow I enjoy eating there. Maybe I just enjoy the fact that I can get enough to eat for $3 if I'm desparate. :)

 I currently live in Denmark and they have KFC and Pizza Hut out here, but no Taco Bell. KFC seems to be perceived as higher quality than other American fast food places because it is made from less processed chicken. Pizza Hut seems to be losing to Domino's and local pizzerias but there is one in a mall in Copenhagen. I was in Japan a few years ago and they had KFCs out there that seemed to do good business. 


YUM is on my radar right now because I read they are doing well in China.  I still haven't pulled the trigger on buying stocks yet, though.

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#6) On August 17, 2010 at 1:42 PM, TMFDeej (97.48) wrote:

Thanks for sharing your thoughts on YUM's international operations, fear and Kurt.


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#7) On August 17, 2010 at 4:52 PM, dragonLZ (91.29) wrote:

for·eign·er (fôr -n r, f r -). n. 1. One who is from a foreign country or place.

YUM is a U.S.-based company, so a "foreigner" would be someone who is not currently living in the United States.

Do you really don't know what Porte meant when he asked: foreigners?

It's not that he doesn't know the meaning of the word foreigners; He was just wondering isn't it actually Americans who need to realize the YUM-restaurants' food is terrible, not the foreigners (Not too many foreign nations "grow up" on that same YUMmy food, and "accidentally", not too many foreign nations have such a serious obesity problem like U.S. does). 

(From your last sentence in the post: How long do you think it will be before foreigners realize that these restaurants' food is terrible?)   

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#8) On August 17, 2010 at 5:03 PM, TMFDeej (97.48) wrote:

Hey Dragon.  Many Americans already know that YUM's food sucks.  That's why the company's same store sales are consistently falling here.

It's the foreign sales in emerging markets that are keeping YUM afloat.  If they ever realize how terrible this food really is, both in terms of quality and for your health, YUM is in trouble.  That's what I was trying to say.


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#9) On August 17, 2010 at 5:17 PM, dragonLZ (91.29) wrote:

I did get that, TMFDeej, but I also got what Porte wanted to say.


FWIW, I agree with you, but I don't think foreigners will stop eating at American-based-fast-food-restaurants that soon. It's going to take some time for that as everything coming from U.S. is usually viewed as "Cool", and in general, everything new is more interesting at first (even when it doesn't taste that great).

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#10) On August 19, 2010 at 12:08 AM, umps15 (85.84) wrote:

Even though their food sucks and is terrible for you, it'll take at least 10 years (maybe 20 ) before the emerging markets recognize this. Why? because you don't see the massive health problems that junk food causes in the short term. I think looking at fast food chains in Japan, would be a good case study in the kind of growth you can expect in China. 

 And emerging markets love all things american. What is more american than stuffing yourself with junk food, getting fat, and clogging your arteries. 

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