Yum! Brands, Inc. (YUM) is struggling as one of its largest markets, China, sees slower economic growth for the first time in 25 years. This Zacks Rank #5 (Strong Sell) recently lowered its full year guidance.
Yum is one of the largest restaurant companies in the world, with over 41,000 restaurants in 125 countries and territories.
It operates the KFC, Pizza Hut and Taco Bell brands as well as a smattering of regional brands in numerous countries.
It is the largest fast food franchise in China and has a long history in the country.
China is Now a Drag Instead of a Driver
China was long seen as Yum’s growth driver with double digit same store sales as far as the eye could see. The company was opening up hundreds of new KFC and Pizza Hut units to meet demand.
For investors who wanted to play China, they could buy Yum and because of its huge China presence, they were essentially buying the China growth story.
Yum’s other business, including the “mature” North American business which included Taco Bell, was considered an after thought. The growth was coming from China and other emerging market countries.
But several missteps in the last couple of years have hurt Chinese sales. First, it was a PR disaster as a 60 Minutes type expose showed the company’s food in a bad light.
Then, Avian flu fears put the damper on sales.
Last year, another PR snafu hit one of Yum’s suppliers which also impacted sales.
But all of that was supposed to be behind the company, only it wasn’t.
On Oct 6, the company reported its third quarter results and shocked Wall Street by posting China same-store-sales of just 2%. KFC was up 3% while Pizza Hut declined 1%.
By comparison, its Taco Bell Division, which is mostly North American, saw same-store-sales growth of 4%.
Lowered China Outlook and Full Year Outlook
Yum expects the Chinese sales recovery to be slower than expected for the rest of the fiscal year.
Full year same-store Chinese sales are expected to be in the low-single-digit negative. It expects Pizza Hut’s recovery to be slower than expected.
Because of the slowdown in China, Yum admitted it could no longer make its target of 2015 EPS growth of at least 10%. It lowered its full year outlook.
However, it remained upbeat about the future of Chinese sales. It recently replaced its China Division CEO and it still opened 108 new units in the third quarter in China.
Its growth projections for new restaurants in the country remains on track.
But is the Yum China slowdown a reflection of Yum’s own brand weakness or a weakness in the overall economy? It’s not completely clear at this time.
Full Year Estimates Cut
The analysts didn’t waste any time in cutting their full year estimates.
12 estimates were cut in the last week, pushing the Zacks Consensus Estimate down to $3.28 from $3.53 in that time.
That is earnings growth of just 6%, which is well under the company’s original guidance of 10%.
Is Yum on Sale?
With the Chinese economy showing many signs of weakness, and then Yum’s own disappointing earnings report in October, it’s not surprising that Yum’s shares have been weak since the summer.
Shares are down 22% in just the prior 3 months.
But the shares aren’t even that cheap. They still trade with a forward P/E of 21 which is above the average of the S&P 500 at 17.7x.
The restaurant industry is hot right now. It ranks in the top 22% of all Zacks Ranked Industries. But choose a restaurant brand that isn’t exposed to China.
Jack in the Box (JACK) is a Zacks Rank #1 (Strong Buy). It’s supposed to grow earnings by 23% this year.
It operates both Jack in the Box and Qdoba Mexican Grill. It doesn’t have ANY restaurants in China.
Want More of Our Best Recommendations?
Zacks’ Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Then each week he hand-selects the most compelling trades and serves them up to you in a new program called Zacks Confidential.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
YUM! BRANDS INC (YUM): Free Stock Analysis Report
Be the first to comment