Best Bargains: Yum! Brands Far From Fried

NEW YORK (TheStreet) -- The only thing Wall Street hates more than market uncertainty is a broken promise. And Yum! Brands (YUM) has been judged harshly for that.

Yes, it was a premature for management to project strong confidence in a quick turnaround, especially in light of major obstacles in China. But I don't believe management intentionally mislead the Street.

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Aside from the scandal involving two suppliers to its KFC restaurants, which were said to have been contaminated with antibiotics, there was also the threat of avian flu in its chicken supply. This, understandably, frightened customers. But there has been no evidence that Yum! knowingly involved itself in these situations.

I won't understate the company's rough PR history, especially since China accounts for more than 50% of Yum!'s total revenue and 40% of its profits. Still, the company's challenges are no secret. Yum! has provided consistent periodic and monthly updates about its performance.

Ayear later, some investors still won't let the company off the hook, even in light of  management's optimism. Yum! has suggested that China would grow at a rate of 15% for the full fiscal year. Although Yum!'s fourth-quarter numbers did fall slightly short of expectations, I believe patient investors can still do well here.

The company posted 3% year-over-year growth in worldwide system sales. This includes 1% decline in the U.S. with 3% and 6% growth in China and Yum! Restaurant International, respectively.

The story, however, continues to be China. Even though system sales grew 3% in the quarter, the company posted a 4% decline for the year.

The cited poultry concerns severely impacted the company's KFC restaurants, which posted a 15% decline in same-store sales. This metric (comps) tracks the performance of stores that have been opened at least one year. Modest comp growth at Pizza Hut locations (up 4%) helped offset the weakness at KFC. But that was only to a certain extent.

As horrific as these numbers may seem, they're meaningful increases to the October and July quarters. Truth be told, not much was expected this time, given the tepid situation. But I was nonetheless surprised by the actual output.

Although worldwide system sales weren't overwhelming (in constant currency), the fact that China revenue was flat has to be considered a victory. This quarter was not the disaster that everyone expected. I say this while knowing full well that the company posted a 22% decline in consolidated operating profits.

But here's the thing: Despite these results, management offered guidance that suggests the worst is over. The projected 20% increase in earnings per share for all of 2014 shows how confident the company is in its business.

I don't believe management would go out of their way to put undue pressure on performance. I take this as some light at the end of the tunnel.

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The other thing to remember here is that the Chinese economy is still in recovery mode. While it's true that management may have gotten burned with some bad press, there's more reason to believe that China's economy is now more to blame in Yum!'s underperformance than, say, any lingering effects the company may feel from past scandals. The results I've seen from McDonald's (MCD) support this theory.

So it still remains to be seen if management's bet on China remains too high. The call for 20% earnings-per-share growth in 2014 would put Yum! back into familiar territory of solid double-digit EPS growth. With some luck and solid execution, Yum! can immediately reverse the decline in both same-store sales and net income.

That makes this stock one of the best bargains on the market.

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

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

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