Yum! Brands Leaves a Bad Taste

 | Apr 11, 2013 | 4:00 PM EDT
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After Wednesday's close, Yum! Brands (YUM) announced the avian flu scare in China had a significant impact. Same-store sales there declined 13%, made even worse when management broke out the results. Sales at KFC fell 16% and Pizza Hut slumped 4%. Since China represents a more than half of its revenue and about 43% of overall profit, investors ran for the exits after hours. We'll know the full impact of the avian epidemic and how management plans to deal with the crisis when the company reports the full quarter after the close on April 23.

Meanwhile, YUM had a rocky year in China. The company faced a public relations nightmare in December when it was accused of selling chickens laced with chemicals. Sales were just beginning to recover when news of a new outbreak of avian flu hit. During the last outbreak of avian flu, the stock fell by nearly a third as company-wide sales declined 4%. With all the difficulties the company has faced this past year, the Street was quick to cut estimates. Right now, the consensus estimate for YUM is for just 1.3% revenue growth. But just because 2013 is a lost cause, that doesn't mean 2014 can't be a success. The consensus estimate for 2014 assumes that sales rebound 12% to $15.5 billion in revenue.

During the last outbreak, sales failed to recover as quickly as investors thought they would. After a dip, growth came back, but only half as strong as before. Although sales lagged, the stock didn't. YUM shares didn't look back after the last outbreak. The stock rocketed higher as investors remained focused on the future growth possibilities of the company.

Using that experience as a guide, I wouldn't try to catch a falling knife; let others try to pick the bottom in this stock. Maybe it falls down to the mid-$50s. Down there it would be a good buy. Perhaps investors are jaded and will jump in on any dip in the shares. Right now, YUM looks too hard to game. I would wait until the dust settles.

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