Yum! Brands Plunges on China Guidance: What Wall Street's Saying

NEW YORK (TheStreet) - Yum! Brands (YUM) shares plummeted more than 4% on Wednesday following the fast-food chain's disappointing profit outlook as China food sales recover at a "slower pace than expected."

Sales at the Louisville, Ky.-based owner of Taco Bell, Pizza Hut and KFC, have been hit hard this summer after reports surfaced that one of its major suppliers in China reportedly re-labeled expired meat.

The company estimates full-year same-store sales will fall by a mid-single digit percentage over last year, and earnings growth will rise by mid-single-digits for 2014 -- below its previous downward guidance to 6-10% growth compared to last year. Back in July, Yum! Brands had forecast earnings growth of at least 20%.

The company also said it expects to deliver "at least 10% EPS growth in 2015," also below analysts' expectations. The chain issued guidance ahead of its Dec. 11 annual investor meeting.

"We are firmly committed to returning to double-digit EPS growth in 2015, delivering at least 10% growth with the potential to do significantly better," Yum! Brands incoming CEO Greg Creed said in a statement. "We fully expect to bounce-back in China and benefit from tremendous sales leverage as sales rebound."

The stock is down 4% this year. Here's what analysts said.

Jeffrey Bernstein, Barclays (Equal Weight; $74 PT)

Bullish investors will argue the '15 guidance for 10%+ EPS growth is prudently cautious (as there is "meaningful upside opportunity"), and we agree as there is no reason to overpromise (i.e. the start of '14) given the variety of China headwinds. With that said, most would agree the '14 China comp is disappointing, with an implied 4Q down 15%+ (relative to expectation down 5-9%). China "sales continue to recover, but at a slower pace than expected". And based on that comp, '14 EPS is now expected up MSD, down from 6-10%. Bottom line, we expect the shares to underperform tomorrow (Wednesday) on continued China weakness.

Andy Barish, Jefferies (Hold; $67 PT)
With 4Q China SSS still hampered by supply fears, YUM revised '14 outlook to mid-single digit EPS growth. The company also introduced '15 guide of at least +10% EPS vs. cons +17%, on another "bounce-back" in China. While many investors have looked past volatility over the past 24-mos in return for China/EM exposure & the div yield, we find it difficult to recommend YUM with growth targets pushed back another yr. We will adjust our model after the Dec 11 Analyst Day.

Brian Bittner, Oppenheimer (Outperform; $80 PT)

Comps in China continue to trend well below expectations which again pressures YUM's earnings model and restricts its valuation. Management initiated a '15 EPS outlook that implies a "bounce-back" of at least 10% growth, arguably a conservative base set by a new CEO. We continue to believe a separation analysis provides support for shares while investors wait for either a corporate restructuring or a business recovery in China. Maintain Outperform.

Karen Holthouse, Goldman Sachs (Sell)

Unlikely to get a clean read on the China business until 2Q results in July: YUM reduced China guidance for the second time and negative MSD for the year implies 4Q down 14%-20%. This in turn implies flat to improving two-year trends, but on an easier compare (the initial food safety incident was in 4Q12). With 1Q a two-month holiday quarter, we believe investors' first chance for a meaningful positive China comp data point is F2Q results in July.

We question if KFC and PH unit growth should continue to accelerate as comp targets are missed. It is also unclear if consensus has correctly modeled net vs. gross unit growth for China in 2015 - using guidance for 700 gross opens would imply consensus embedding only ~70 closures in 2015 versus 220-300+ in each of 2013 and 2014E.

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 compelling growth in net income, impressive record of earnings per share growth, notable return on equity and increase in stock price during the past year. We feel these strengths outweigh the fact that the company shows low profit margins."

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

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Hotels, Restaurants & Leisure industry. The net income increased by 165.8% when compared to the same quarter one year prior, rising from $152.00 million to $404.00 million.
  • YUM BRANDS INC reported significant earnings per share improvement 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 ($3.23 versus $2.36).
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. In comparison to other companies in the Hotels, Restaurants & Leisure industry and the overall market on the basis of return on equity, YUM BRANDS INC has underperformed in comparison with the industry average, but has greatly exceeded that of the S&P 500.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 9.4%. Since the same quarter one year prior, revenues slightly dropped by 3.2%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • In its most recent trading session, YUM has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. 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.

-Written by Laurie Kulikowski in New York.

Follow @LKulikowski

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