YUM's Results Surprise Investors

07/17/2013 10:00 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Last week's earnings from YUM! Brands were a pleasant surprise to shareholders and MoneyShow's Jim Jubak explains what this may mean for their future growth prospects.

Okay, on July 10, Yum! Brands came out and announced its earnings for the second quarter and the stock is trading somewhere near an all-time high so this is really important and what you got was good news. Yum! has had a lot of trouble in China. 

There was a big scare about tainted chicken supplies from suppliers that they had high levels of antibiotics in them.  People stopped eating there, their and China sales collapsed.  They were down 29% in April.  Since then, it has been a process of working its way back so that sales were only down year-to-year 19% in May and the latest numbers announced with the earnings were that they were only down 10% in June so good news. 

The company seems to still be on track toward having China turn positive in the fourth quarter at the end of the year and that is what the company has been saying all along so that you can say okay, this stock is really worth it because their business is bouncing back.  The thing that this whole episode has obscured is increasing competition to Yum! in China. 

You certainly have big market share through Kentucky Fried Chicken and for Pizza Hut but McDonald's is certainly making a big effort to move into this market.  There are more McDonald's every day, still not as saturated as Kentucky Fried Chicken, so the thing that is obscured really is growth.  If you take out all of this mishegoss about chicken supplies and dropping in sales, are there core problems in the Kentucky Fried Chicken story in China and the Yum! Brand story in China, that this is all obscured. 

It is very, very hard to tell so you can look at this and say oh, okay, margins in the company's restaurants around the world were down about 2.5%, 2.7%, down 5% in China.  You can say, does that mean anything? Does it not mean anything?  Well, with that huge number, huge decline in margins in China, you can't tell.  Certainly, the business in China is bouncing back but without some sense of whether the Chinese market is enthusiastic about that, whether they think the restaurants have become old hat, whether they are going to be losing market share to competitors, with that, even that at an all-time high, Yum! isn't really something that I want to buy until I can figure this out, right now hidden underneath the China data. 

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