Consider buying Yum, McDonald's as China becomes more consumer-driven
The news: McDonald's will hire 70,000 new employees in China as part of its expansion plans, which includes opening 250 mainland locations this year.
The significance: The first-quarter earnings season has shown that China's economic growth is becoming less infrastructure- and export-driven and more consumer-driven - exemplified by heavy equipment makers reporting lower demand but consumer brands reporting gains. Among those consumer brands are McDonald's and KFC, which is owned by Yum! Brands. Yum is likely to remain the more successful of the two companies as it has more than double McDonald's market share and is expanding faster. In addition, KFC has better adapted its offerings to the Chinese market, something McDonald's continues to struggle with. That said, both companies are likely to succeed, it's just a matter of degree. McDonald's stock, at 17-times price-to-earnings compared to Yum's 22, has declined roughly 10% from a peak in mid-January and that may present a buying opportunity. In addition, both brands are exposed to China but not overexposed, an important consideration given China's recent economic slowdown.
The takeaway: Investors might consider buying McDonald's (MCD.NYSE) or Yum! Brands (YUM.NYSE) as China's economy becomes increasingly consumer-driven.