Why Normal Isn't Good Enough for Yum!
07/11/2013 12:20 pm EST
Sales have recovered somewhat after the "Chickengate" episode in China, but its stock price hasn't really gone down enough to compensate for so-so future growth prospects, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
YUM! Brands (YUM) is moving back toward normal in China, according to second quarter earnings announced after the market close yesterday.
But is "normal" enough for a stock that's trading—even while the China problem continues to hurt sales—near an all-time high?
At the end of 2012, sales at YUM! Brand's KFC stores in China fell off a cliff when government officials discovered that some suppliers had fed their chicken more antibiotics than permitted under Chinese rules. By April 2013, sales were down 29% from April 2012.
In the months since, sales have clawed their way back toward normal. In May, sales were down just 19% from May 2012. In June, the company announced Wednesday, the decline had been trimmed to just 10% year to year. And, the company continued, by the fourth quarter of 2013, growth in China will have turned positive.
For the second quarter, the company announced earnings of 56 cents a share, two cents a share better than Wall Street projections. Sales came in at $2.9 billion, slightly short of the $2.93 billion consensus, and an 8.3% drop from the second quarter of 2012.
What's hard to tell from these results—and what has been hard to tell about YUM! Brands (YUM) ever since the hatching of the China chicken disaster—is what the underlying growth trend is for YUM! Brands (YUM). Before the huge drop in sales in China overwhelmed all the other numbers from the company, YUM! Brands (YUM) was showing strength on a turnaround at its Taco Bell stores.
But the company faced important questions about future growth. China, while not exactly saturated with KFC and Pizza Hut stores, was getting full—especially because competitors such as McDonald's (MCD) were speeding up their expansion into China. In response YUM! Brands (YUM) had announced a move to make India its next big growth market. And then there was the question of whether YUM! Brands (YUM) could keep the momentum it had built at Taco Bell against a counterattack from McDonald's. (McDonald's is a member of my Jubak's Picks portfolio.)
The numbers announced Wednesday aren't all that reassuring on those grounds. US same-store sales picked up just 1% in the quarter. That's behind the 2.4% US same-store sales growth McDonald's announced for May. And below the 1.4% same-store sales growth expected by Wall Street. Same-store sales grew by 2% in India. The company increased its KFC stores in India by 34% to 285—which seems impressive until you recognized that the company has 4,429 KFC stores in China.
With the stock trading near its all-time high, I think what investors are paying for is that the company will deliver the promised recovery in China by the end of 2013 and what CEO David Novak said Wednesday would be "a strong bounce back year in 2014."
The stock is priced for that bounce back even if the numbers now don't convince me that it's more than a promise.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of DaVita HealthCare Partners as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund's portfolio here.