How to Invest in KFC Stock

KFC is a major force in the fast food industry. Its 21,000 worldwide locations put the chain, best known for its fried-chicken buckets, in the same league as industry giant McDonald's (NYSE: MCD) and its 36,000 restaurants.

While you can buy Mickey D's simply by purchasing the stock, you can't invest as directly in KFC, because it's not a standalone public business. Instead, to benefit from growth in this quick-service restaurant chain you'd have to buy shares in its corporate parent, Yum! Brands (NYSE: YUM).

What else does Yum! Brands own?

Yum! Brands owns the KFC franchise along with the Pizza Hut and Taco Bell concepts. Together, these restaurants operate out of 43,000 locations around the world and cover a broad range of fast-food specialties. In addition to KFC's 21,000 stores, Pizza Hut has over 16,000 and Taco Bell has nearly 7,000. Like most peers in the industry, Yum! Brands uses a franchised operating model through which nearly all of its locations are run by local franchisees that pay royalties and fees in exchange for use of the brand and access to the company's efficient supply chain.

McDonald's has used this approach to generate awesome long-term returns, including an operating profit margin that's near 40% of sales. Restaurant Brands has a similar strategy in controlling Tim Hortons, Burger King, and Popeyes Louisiana Kitchen. But its store footprint is about half the size of Yum! Brands'.

How much is KFC worth to Yum! Brands?

KFC is both the fastest growing and the most profitable franchise in Yum! Brands' portfolio today. The chain boosted comparable-store sales by 7% last year, compared WITH 6% for Taco Bell and 2% at Pizza Hut. KFC is also expanding faster than its rivals, considering Burger King grew by just 2% in 2016 and McDonald's improved comps by 4%.

KFC contributes more than its fair share to Yum! Brands' broader profit results. The division kicked in $911 million, or just over half of the company's operating profit, last year. Executives credited the chain's focus on its core strengths for that success. Innovations like the Nashville Hot flavoring lineup brought new tastes to its menu, for example, without straying far from its fried-chicken roots. "We did not change the form of our product," Yum! Brands CEO Greg Creed told investors, "only the flavor profile, and our customers love it."

The trends to watch

Creed and his team are hoping that similar innovations will keep that positive momentum going. After all, the business' heavy tilt toward the KFC brand means that Yum! Brands' overall numbers will be heavily influenced by its results.

So far in 2017, for example, the KFC division's 3% comps growth has been the key factor in the company's overall 4.5% revenue gain. KFC is also becoming more profitable, as operating margin jumped to 31% of sales from 27% a year ago, mainly thanks to a refranchising initiative that's reducing the share of company-owned locations even closer to zero.

The chain is running out of room to expand profitability with that strategy, since franchisees already own 95% of its stores, compared with 85% at McDonald's. That means the key drivers for KFC's earnings growth in the years ahead will be its international expansion and its ability to crank out menu innovations that keep chicken fans returning to its restaurants, even as fast-food rivals work to halt its positive market share momentum.

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Demitrios Kalogeropoulos owns shares of McDonald's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.