Bear of the Day: Yum (YUM)

Zacks

Missteps in China have hammered Yum! Brands, Inc. (YUM) earnings growth in 2013. Will this Zacks Rank #5 (Strong Sell) turn it around in 2014?

Yum Brands is the world's largest restaurant chain operating three famous brands: KFC, Pizza Hut and Taco Bell. It is also the largest restaurant chain in the lucrative Chinese market.

Third Quarter EPS Miss

On Oct 8, Yum reported third quarter results which missed on the Zacks Consensus Estimate by $0.08. Earnings were $0.85 compared to the consensus of $0.93.

The big miss was a surprise because Yum's problems in China, which had been ongoing since a December 2012 television expose led to adverse publicity about its poultry supply, were well known. The company has been updating the China sales monthly.

However, Chinese sales, which Yum kept insisting would rebound back into the positive by the fourth quarter, did not recover quickly enough.

In the third quarter, China same store sales fell 11%. Yum provided a September same-store-sales update, which is part of Q4, and those were estimated to have declined 11% as well with KFC falling 13% while Pizza Hut gained 6%. KFC is the larger chain in China, however.

In early Oct, Yum admitted that the China Division same-store sales were now 'unlikely' to be positive for the fourth quarter.

A lot of focus has been on the problems in China, which the company also has blamed on spring's Avian flu break-out.

But same-store sales were flat in the U.S. in the third quarter as well. Even internationally, excluding China, same-store sales grew just 1% in the third quarter.

Lowered Guidance

Given the lack of a recovery in the China Division, Yum lowered its full year earnings outlook.

The analysts also moved to lower both 2013 and 2014 estimates.

Earnings are now expected to decline 10.5% in 2013 from 2012 to $2.92 per share.

While analysts see a turnaround in 2014, as China gets sorted out, 15 estimates have been revised lower since the earnings report. The 2014 Zacks Consensus Estimate has fallen to $3.63 from $3.79 just a month ago.

Shares Fall

Shares of Yum fell after the earnings report but still trade with a forward P/E of 23 which is higher than the average of the S&P 500 of 16.1.

The Zacks Rank is a short term recommendation of 1 to 3 months. Yum said it expects to grow earnings by at least 20% in 2014. The analysts currently forecast 24% earnings growth.

Investors should be watching the monthly China Division sales updates. The October sales are expected to be released on Nov 12 after the market closes.

As an alternative, check out Chipotle Mexican Grill (CMG). It is expected to grow earnings 21% both this year and in 2014. It has only just begun its international expansion. Chipotle is a Zacks Rank #2 (Buy).

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.


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