I started a small position in YUM! Brands (YUM) at $33.60 for my long term stock portfolio. I have had YUM! on my radar for awhile and it piqued my interest when I heard Karen Finerman discussing YUM! on CNBC’s Fast Money. She discussed how YUM! was trading at a cheaper valuation than other casual dining chains like Cheesecake Factory. YUM! is trading at 15 times earnings for the current fiscal year. While I don’t think that YUM! is expensive at $33 per share, I don’t think the shares are a steal either. YUM!’s shares appear fairly valued based on current earnings expectations of $2.09 per share.

I think that YUM! is attractive based on its long term growth prospects. YUM is the largest quick service restaurant chain in the US owning KFC, Taco Bell, Pizza Hut, Long John Silver and Wing Express franchises. The story for YUM! is in its international growth where YUM! is growing in the high teens overseas especially China. For the 2nd quarter YUM! grew earnings per share (EPS) by 10%. This is in the midst of a recession that has caused same store sales to decline 1% domestically and 4% internationally. Despite decreased sales YUM! was able to improve profitability. Net income increased by 35% due to higher margins on sales.

YUM! is proving that it can operate efficiently in a challenging economic environment. YUM! is tempering expectations by revising earnings downward and forecasting 0% EPS growth year over year. I think the long term story is still in tact for YUM. In the short term as consumers trade down from higher priced restaurants brands like KFC and Taco Bell should directly benefit. Longer term as foreign economies improve YUM! should see greater top line growth in the form of increasing sales and comps internationally. US growth should be moderate in the single digits and overseas growth should be robust in coming years. The company also pays a decent dividend of 2.3%. While McDonald’s is my favorite company in the restaurant industry; I think that YUM! Brands is a solid investment opportunity as well.