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TheStreet Open House

Yum! Brands Stock Looking Tasty After China-Inspired Pullback

NEW YORK (TheStreet) -- Over the past couple of weeks, growth-hungry investors have pushed away from the Yum! Brands (YUM) buffet. Value-seeking investors, on the other hand, should not hesitate to buy shares of a company that has been drastically oversold.

Shares, at around $72, are down 7% on the year to date -- worse than the restaurant sector's 1% decline. Since reaching a high of $83.58 less than a month ago Yum! has lost 16% of its value, in large part because of the recent scandal with its food suppliers in China.

Read More: Three Chinese Internet Stocks to Own for Long-Term Growth

Unfortunately, Yum! is no novice in this area. The company has suffered before from these types of incident and the stock has rebounded. The company could not be reached for comment.

China is the company's most important segment. Despite the recent disruptions the company just its full-year guidance of earnings per share growth at 20%, after the company delivered 30% year-over-year jump in earnings per share. Investors bailing on the stock are doing so for the wrong reasons.

The stock, which is trading at just 17 times next year's estimates of $4.11, is still cheap. With management's new restaurant initiatives focusing on healthy doses of protein to better compete with Chipotle Mexican Grill (CMG), these shares will regain $80 in the next 12 months. It's going to take time for the dust to settle.

As for the dust-up in China, there is very little companies can do to monitor the actions of contract suppliers, especially those in other countries. The responsibility is on the Chinese authorities.

Yum! has taken appropriate courses of action, including limiting menu items, to mitigate the threat and ensure that its meats were safe to eat. At this point, there's limited downside risk in the stock, given management's confidence in reaffirming its outlook.

Considering the recent 21% jump in Chinese systemwide revenue and the almost 200% surge in operating profit, Yum! will still beat its full-year forecast even if it revenue in China were to suffer for the current quarter. Last year's numbers showed that consumers love KFC, especially in China.

Read More: 5 Hated Earnings Stocks You Should Love

The company, whose restaurants include KFC, Pizza Hut and Taco Bell (among others), has fed Americans for many decades. Value-hungry investors should now feed on the market's overreaction to an issue that was beyond Yum!'s control and may soon be forgotten.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Follow @Richard_WSPB

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, growth in earnings per share and notable return on equity. 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 5.8%. 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 -26.36%.
  • 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 ($3.60 versus $2.36).
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market, YUM BRANDS INC's return on equity significantly exceeds that of both the industry average and the S&P 500.

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