The Worst Is Over for Yum! Brands

NEW YORK ( TheStreet) -- Back in July, shortly after Yum! Brands ( YUM) reported its second-quarter earnings results, I argued that the stock -- at the time trading around $72 per share -- would not go higher than $75. Yum! investors disagreed.

Fast-forward three months later: Shares are trading right around where they were in July. Before we continue, I need to make it clear that this is not -- by any means -- a bearish thesis on Yum!. In fact, on more than one occasion, I've come to the company's defense, commending its management team for taking appropriate action to address not only the scandal involving two suppliers to the company's KFC restaurants, but also ensuring consumers that the chickens (if cooked properly) were safe to eat.

Nevertheless, while it is clear that the company continues to progress from what has been a rash of bad publicity, I still don't believe there is much value in the stock, which now seems fairly priced on the basis on long-term, free-cash-flow growth of 11% to 13%. With the company's third-quarter earnings results due out Tuesday, it will take exceptional same-store sales and better-than-expected guidance to send the shares higher. Investors should definitely not hold their breath, expecting either scenario will play out.

Although analysts will be looking for better results -- and by "better" I mean numbers that are meaningfully superior to the periodic updates provided by the company -- the good news is, given that China accounts for more than 50% of Yum!'s overall revenue, the Street already knows the full extent of Yum!'s troubles in that market.

This also means, regardless what the numbers may say, there will be very limited downside in the stock. What's more, as bad as Yum!'s results in China have been, including a 20% decline in same-store sales in the July quarter, things were never as bad as previously believed -- even though same-store-sales for the company's KFC restaurants in China was down 26% year over year.

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