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Would You Open 700 New KFC Outlets in China in the Year of Bird Flu?

Dee Gill

Shares of YUM! Brands (YUM) have been hard hit by China’s bird flu outbreak, which has cleared customers from hundreds of its KFC fast food outlets. It’s a big setback, even if an unfair one, for the multitudes of investors who bet that the company’s problems in China were under control.

YUM’s exposure to China – it gets more than half of its $13.63 billion in annual revenue from them – has made its shares particularly vulnerable to reports of several deaths there from a particularly virulent strain of bird flu. But the company is not alone in its financial losses from the disease. As seen in a stock chart, share prices have also dropped for Tyson Foods (TSN), which gets a lot of its revenue growth from chicken sales to China, as well as for international airlines such as Delta Air Lines, (DAL), United Continental (UAL) and US Airways (LCC). Ironically, ADRs for China Eastern Airlines (CEA) have recouped some of their earlier losses.

YUM Chart

The flu reports started rolling out March 31, and by Wednesday, the official death toll had risen to nine and included deaths in Vietnam and India. Chinese authorities are advising people that cooked chicken – like the fried chicken KFC sells -- cannot transmit the disease. But there is widespread distrust of that advice among the population, as well as doubt that the number of cases was as low as the government had reported. News reports show video of empty KFCs throughout the country. McDonald’s (MCD) has cut the price of its chicken nuggets in China by almost half, and it still sells plenty of burgers there.

The flu outbreak comes just as YUM was getting a handle on unrelated problems in China that will rob the company of profit growth this year. Same store sales at KFC China were down 6% in the past quarter following an investigation into some of its chicken suppliers, which were feeding their flocks excessive amounts of antibiotics. YUM has tightened its supply chain, but it doesn’t expect KFC China’s same store sales to show gains again until the end of this year. Nevertheless, it’s opening some 700 new KFCs in China this year.

The uncertainty over how quickly – and how many -- customers will return to KFC China has been a drag on YUM’s share price. But encouraging same-store sales reports released in February led several analysts to highlight 2014 forecasts, which call for significant revenue and profit growth. Still, YUM shares remain relatively highly valued, with a PE ratio of about 20, both on a trailing and forward basis, which many analysts believe is too expensive for today’s investors. McDonald’s dividend yield at 3% is still much better than YUM’s 2%.

YUM Forward PE Ratio Chart

If there is a financial upside for YUM here, it may come from more business at its other fast food outlets in China. Perhaps Pizza Hut and Taco Bell can attract some of those flu-wary diners.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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