If continually high sales growth is any indicator, it appears as though global consumers have taken to American-born fast food. Couple this with a rapidly growing global middle class demanding meat and poultry, and it’s a recipe for strength in shares of fast food brands with a high level of exposure to China. Urban household incomes in China have more than tripled during the past decade, allowing the recipients of that cash to afford meat. Theoretically, this drives up both the price of food and the sales of fast food, which is notoriously less expensive than other options.
The recent economic report that China’s growth is slowing scared some investors out of stocks with high China exposure as many feared the white-hot growth described above would dissipate. The fact remains; however, that the annual economic growth rate in China is 9.1 percent, far higher than any other country. This in turn can be expected to continue to drive growth and bolster shares of fast food chains that have already demonstrated tremendous strength through the recession.
Below are two stocks that will likely continue to gain from these trends and the trends in food demand overall.
McDonald’s (MCD) McDonald’s recent third quarter report indicates that the company is directly benefitting from the changes in food demand that can currently be observed. Third-quarter earnings for the company rose 8.6 percent as same-store sales grew in the U.S. and Europe as well as other markets.
The demand for food from emerging markets has caused the price of corn and other commodities to rise, thereby inflating the price of beef, poultry and food in general. Considering the borderline recessionary nature of the U.S. economy and the ongoing fiscal struggles in Western Europe, it’s little surprise that sales of notoriously cheap fast food are rising.
Fast food companies are able to keep costs low compared with other food makers. How they do this is another story that we’d perhaps rather not know, but their ability to shill items at low cost seems to benefit them especially in a weak economy.
More Americans and Europeans flooding McDonald’s to avoid higher prices at the grocery store might be enough to bolster the stock, but a 5 percent global increase in same store sales and 3.4 percent sales growth in the Asia Pacific, Middle East and Africa division bodes even better for the future of the stock.
Food demand in China is not going to fall, as wealth and population rises. The likelihood is that neither will commodity prices. The higher they go, and the faster that people in emerging markets have income to spend, the stronger the sales are likely to be.
Shares of McDonald’s are approaching their 52-week high, but with results that smashed expectations and macro economic factors supporting ongoing sales growth, they could continue to reach new heights.
Yum Brands (YUM) -the parent company of KFC, Pizza Hut and Taco Bell has been rising on its China exposure throughout the massive economic growth of the last several years. The Chinese population has demonstrated an affinity for fried chicken and pizza, reflected in the blockbuster earnings of Yum Brands overseas.
During 2010, Yum sought to capitalize on that growth by opening a new KFC in mainland China nearly every day. Now, the company, which has over 36,000 fast food restaurants in more than 100 countries and generates roughly 60 percent of its earnings from overseas markets.
The largest of these markets is China where growth continues to rise. Domestically, KFC and Pizza Hut have been flailing, but their success in emerging markets seems as though it can compensate for a percentage of those losses.
Yum intends to continue to expand their presence in China in order to best exploit demand there. The stock has lost some if its value alongside the reports of slower growth in China and is now trading around $51.50. Analyst consensus for YUM is $59.56 or the equivalent of a 15-plus percent upside potential.