Despite lower gas prices and a relatively strong U.S. economy, it has been a tough time for many restaurateurs. And for those with a global focus, the pain has been especially severe as a slowdown in many key emerging markets, such as China, appears to be in full swing.
Take for example Yum! Brands (YUM), the global fast food behemoth. The company owns Pizza Hut, KFC, and Taco Bell, but it has been having a pretty disastrous stretch as of late. In fact, YUM is down close to 18% in the past three months (compared to a market loss of 4% in the period), and if you look at the company’s most recent earnings report, there are definitely clues that suggest this trend could continue.
Recent YUM Earnings
Although YUM beat estimates by a penny and earnings were up year-over-year, revenues came in a bit short. Sales missed estimates by 3%, while they declined by the same amount when compared to the year ago period.
The cause of these sluggish numbers was undoubtedly weakness in the all-important China division. The comps here were down 14%, and this was worse than company expectations of a 13 percent decline. Part of this decline stems from more issues with improper food handling and a lack of hygienic practices, but this just continues a string of bad publicity incidents for YUM in China which have probably scared off many consumers.
Outlook & Estimates
YUM doesn’t believe that China will turn around in the near term either, as it looks for another six to nine months for the important division to recover. Given this outlook, YUM now expects full year earnings to grow between a range of 6%-10%, far lower than their previous call which called for growth of 20%.
With this slashed outlook, and the ongoing general weakness in China, it shouldn’t be too surprising to note that analysts have been cutting their EPS estimates for YUM as well. In fact, 10 estimates in just the past week have been slashed for the current quarter, while the current full year also saw 10 go lower too.
The magnitude of these earnings estimate revisions has also been pretty severe, showcasing just how bearish analysts have become on the company. Current quarter estimates have plunged from $0.97/share 60 days ago to $0.78 today, while full year estimates have gone from $3.38/share to $3.55/share over the same time frame.
With these negative estimate revisions, it shouldn’t be too surprising to note that we currently have a Zacks Rank #5 (Strong Sell) on this stock. This means that we have this in the bottom 5% of all stocks that we cover, and that investors should look for better opportunities in the near term.
Other Picks
Fortunately for investors seeking to stay in the restaurant sector, we currently have a relatively favorable rank on the space, just inside of the top 40% overall. More than a dozen companies in this segment have ranks of ‘buy’ or better, but Jack in the Box (JACK) could be especially intriguing right now.
Not only does JACK have a top Zacks Rank #1 (Strong Buy), but it has just moved up to this top echelon in the past week. Plus, the company just saw a strong earnings beat, and it hasn’t really slid as much as its competitors in the recent slump.
So if you are looking for a better restaurant stock in the near term, definitely look to JACK, as it appears to be better positioned to take advantage of current market trends than its more internationally-focused cousin of YUM! Brands.
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