Yum Brands (
YUM
,
quote
) dropped almost 10% in Friday trading in New York after reporting
disappointing quarterly earnings. Is now the time for investors to
jump into this beaten down name?
[caption id="attachment_60544" align="alignright" width="300"
caption="KFC in Beijing"]
[/caption]
Although Yum Brands' roots are firmly planted in the United
States, emerging market growth is what has fueled the substantial
rise in the company's equity; prior to yesterday's seven-plus point
drop, this large-cap stock was up more than 100%.
The umbrella company for noted brands Kentucky Fried Chicken,
Taco Bell, and Pizza Hut, Louisville-based Yum Brands has increased
its focus on the world's second-largest economy: China (
FXI
,
quote
). The company's initiatives in China have been very successful. As
of this most recent quarter, the group saw
44% of its revenue come from China
thanks largely to the popularity of its KFC brand.
While China had previously been a principal catalyst in the
stock's rise, the precipitous drop in Yum Brands Friday was the
result of fears over the health of the Chinese consumer. The
company, like McDonald's (
MCD
,
quote
) previously had indicated, said fourth quarter same store sales in
China
were not particularly strong
.
Analysts have posited that the decline in same store sales is
likely attributable to both macroeconomic factors and uncertainty
pertaining to the recent Chinese leadership transition.
However, with Chinese economic data starting to improve and the
political transition having taken place without significant public
disruption, Chinese consumer health could return to previous levels
in the near future which could positively affect shares of Yum
Brands.
Technically, the stock broke a number of major levels of
resistance in its post-earnings drop. Short-term traders should
look for a reversal before getting into the stock. At 17x forward
P/E, the shares aren't particularly cheap. However, assuming that
Chinese growth returns soon, investors with a longer time horizon,
Yum! Brands could be attractively priced for investors looking for
exposure to Chinese middle-class consumption.
Disclosure: Author's family is long YUM
