Yum! Brands Stock Down on Fourth Quarter Expectations

Yum! Brands stock price opened sharply down Friday as Wall Street digested the company’s revised fourth quarter forecast. Yum’s CEO, David Novak, told analysts he expected same-store sales in China to drop by about 4% for the fourth quarter, a dramatic drop considering the company posted a gain of 21% for the same quarter last year. Novak also said the company is revising its forecast for opening new stores in China, cutting the number from 800 to 700.

But, Yum’s revised expectations are no reason for investor to panic. Stock analysts’ reaction to Yum’s announcement was mixed, with some immediately downgrading their rating, while others still maintained a buy rating.

Yum!, which operates the KFC, Taco Bell and Pizza Hut brands has about 4,800 restaurants in China and while that is less than 13% of their global store count, during the third quarter sales from China accounted for more than 44% of Yum’s revenue. David Tarantino, an analyst at Robert W. Baird & Co., discussing the overall economic climate in China noted, “China softness may reflect choppy macroeconomic conditions, cautious consumer sentiment surrounding the recent government transition”.

Yum is not the only restaurant company to experience a slowdown in sales growth. One of the company’s biggest competitors, McDonald’s, reported its same store sales in China were down in October and John Ivankoe, an analyst with J.P. Morgan said, “The slowdown has clearly weighed on the business and competition,” but he went on to say he didn’t see any indications that things are worsening.,”

The company’s China Division consists mostly of company owned KFCs and Pizza Huts, as well as a network of hundreds of independent Chinese suppliers and twenty logistics centers, making it the biggest American restaurant company in China. Investors should not be too quick to exit Yum stock and should consider the company’s fundamental strengths before they put too much emphasis on the lowered fourth quarter expectations.

Yum! has some of the most recognizable brands in the world and has increased dividends the past five years at a rate of nearly 20%. That’s, more than double the average in their industry and the company has plenty of cash to fund more of the same. Yum has nearly a billion in cash (and cash equivalents) on its balance sheet and a history of share repurchases. It announced earlier this month it approved an additional $1 billion for future share repurchases, in addition to over $200 million already available for repurchase.

In addition to their strong cash position and popular brands, Yum has a strong CEO, David Novak. Novak has been working with the main Yum brands since the 1990s when he held several senior management positions at Pepsi when they owned the KFC, Taco Bell and Pizza Hut brands. He has strong operations and marketing experience and has been instrumental in developing and overseeing Yum’s growth.

While Yum’s revised forecast is certainly disappointing, it hardly seems enough reason to be down on the stock long term, in light of the company’s strong fundamentals.