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TheStreet Open House

Why KFC, McDonald’s Can Survive Even a Nasty Food Scare in China

BEIJING (TheStreet) -- A pregnant woman we'll call Mrs. Lin was happy to chat about the latest McDonald's (MCD)-KFC-Pizza Hut food safety scare after eating a chicken sandwich, french fries and ice cream cone Monday at a shopping mall KFC outlet in Beijing.

What she said -- and ate -- suggests investors may want to think twice before concluding that the scare will hurt the wildly popular McDonald's or Yum! Brand's (YUM) KFC and Pizza Hut restaurants in China.

Mrs. Lin, who didn't want her real name used, is a middle-class office worker whose baby is due in September. She'd heard about the Sunday night shutdown of a Shanghai meat plant that supplied McNuggets and similar products.

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The shutdown followed a raid by Shanghai city government food inspectors, accompanied by state TV news crews, on the plant run by Husi Foods, a division of Illinois-based OSI Group. Inspectors cited the plant for processing food with outdated chicken and beef.

The CCTV and Dragon TV news reports stressed that the McNuggets assembly line floor was wet and dirty. The official Xinhua news agency and the Communist Party's People's Daily newspaper gave the story prominent play.

McDonald's and Yum! outlets in China responded by pulling some foods off menus. The companies also joined Husi in promising to cooperate with authorities as the food safety probe, which began in June, continues.

Mrs. Lin said she had no qualms about eating at KFC or any other American restaurant. Like most Chinese, she's familiar with China's long struggle with food safety problems and feels more trusting of American chain restaurants than Chinese eateries. That trust is strong despite a similar food safety scare that hit KFC and McDonald's in 2012, prompting a temporary dip in their China sales.

"You know, in China, it's hard to say whether any food in safe," she said. "I visited America for business in 2010. The food there seemed safe.

"Chinese food culture and American food culture are different," she said.

Eating at tables near Mrs. Lin were other office workers, groups of teen-agers, and mothers with children.

News of the Shanghai incident was a trending topic on the Sina Weibo microblog for most of the day Monday in China. By evening, though, the topics "KFC" and "McDonald's" were no longer in the top 20.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates YUM BRANDS INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate YUM BRANDS INC (YUM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in net income, good cash flow from operations, increase in stock price during the past year and growth in earnings per share. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 8.4%. Since the same quarter one year prior, revenues rose by 10.3%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Hotels, Restaurants & Leisure industry average. The net income increased by 18.9% when compared to the same quarter one year prior, going from $281.00 million to $334.00 million.
  • Net operating cash flow has significantly increased by 56.70% to $514.00 million when compared to the same quarter last year. In addition, YUM BRANDS INC has also vastly surpassed the industry average cash flow growth rate of -21.57%.
  • The stock price has risen over the past year, but, despite its earnings growth and some other positive factors, it has underperformed the S&P 500 so far. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • YUM BRANDS INC has improved earnings per share by 19.7% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, YUM BRANDS INC reported lower earnings of $2.36 versus $3.37 in the prior year. This year, the market expects an improvement in earnings ($3.68 versus $2.36).

TheStreet Ratings team rates MCDONALD'S CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate MCDONALD'S CORP (MCD) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, good cash flow from operations and notable return on equity. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MCD's revenue growth has slightly outpaced the industry average of 8.4%. Since the same quarter one year prior, revenues slightly increased by 1.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.86, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.28, which illustrates the ability to avoid short-term cash problems.
  • 43.68% is the gross profit margin for MCDONALD'S CORP which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 17.98% is above that of the industry average.
  • Net operating cash flow has increased to $1,907.30 million or 13.06% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -21.57%.
  • MCDONALD'S CORP' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, MCDONALD'S CORP increased its bottom line by earning $5.56 versus $5.36 in the prior year. This year, the market expects an improvement in earnings ($5.75 versus $5.56).

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