The parent of KFC was already slowing down in China, its biggest market, before the quality control scandal came along that threatens to drag it down further, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
Shares of Yum! Brands (YUM) continue to take a beating-they're down another 1.16% as of 3:30 p.m. New York time-on reports from China alleging that suppliers to the company's KFC chain had injected antiviral drugs and growth hormones into chickens they sold to Yum! Brands restaurants.
China's Internet sites, such as Sina Weibo, have seen outrage and calls for a boycott of KFC until consumes can be sure KFC food is safe. (The alleged actions by suppliers would be in violation of Chinese food safety regulations.)
McDonald's (MCD) operations in China have been hit by similar allegations, but the company has responded with a statement saying that its chicken in China was tested by a third-party laboratory and complied with government regulations.
That, plus McDonald's lower profile in China-KFC is by far the dominant fast-food brand in China-has left McDonald's shares relatively undamaged. (China accounts for about half of Yum! Brands' revenue and profits. McDonald's is a member of my Jubak's Picks portfolio.)
Before you decide to treat this scare as a temporary glitch in Yum's China growth story-and an opportunity to pick up shares-remember that even before this incident, Yum! Brands looked to be having trouble in China. And that the stock has been falling since it closed at $74.47 on November 29. Shares of Yum! Brands are down 11.2% from that date through December 20.
On November 30, Yum! told investors to expect a 4% drop in same-store sales in China for the fourth quarter of 2012. That's a shocking decline from the company's 21% gain in same-store sales in the fourth quarter of 2011.
Part of the reason for the decline is a tough comparison with that 21% gain in the fourth quarter of 2011, and part of the reason is related to the slowdown in China's growth from 2011 to 2012.
But Wall Street analysts immediately noted that some of Yum! Brands competitors in China weren't reporting the same kind of sales declines. For example, Starbucks (SBUX) said on December 5 that it hadn't seen a slowdown in same-store sales growth over the past two months.