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Bear of the Day: Yum Brands

Yum! Brands, Inc. (NYSE: YUM) has a China problem. This Zacks Rank #5 (Strong Sell) recently cut its full year guidance as Chinese sales are struggling to recover after a July incident with a supplier.

Yum operates over 40,000 KFC, Pizza Huts and Taco Bells in 125 countries and territories. It is the largest fast food operator in China.

Supplier Scare Impacts Sales

On Oct 7, when Yum reported its third quarter results, it cited soft China sales as a reason for cutting full year guidance.

In July, an undercover report aired on Chinese television showing improper food handling. The supplier was fired, but the damage was done. Third quarter China Division same store sales fell 14%.

But Yum has dealt with Chinese food scares in the past. It knows how long it takes for sales to rebound.

In its third quarter press release, it said that sales were “rebounding” although they continued to be negative.

Sales Not Recovering Quickly Enough

But on Dec 9, the company issued another full year warning saying that while sales continue to recover, they were doing so at a pace that was slower than expected.

It estimated that the China Division full-year same-store sales would be negative mid-single digits.

On Dec 11, the company also reported that November China same-store sales fell 15% but that it was seeing a recovery in December.

While earnings growth would be dampened in 2014, the company said it was committed to returning double digit earnings growth of at least 10% in 2015.

Earnings Estimates Slashed

Not surprisingly, the analysts moved to cut full year earnings estimates for both this year and next.

13 estimates were cut in the last week for 2014 pushing the fiscal 2014 Zacks Consensus down to $3.14 from $3.38 just 90 days ago. This is earnings growth of just 5.2%.

Analysts still see earnings growth of 13.5% for next year although 14 estimates were also lowered.

Shares Sank

Investors bailed out of the shares after guidance was cut.

But shares still aren’t cheap. They trade with a forward P/E of 23.

For investors interested in fast food chicken, they might want to consider El Pollo Loco (NASDAQ: LOCO) which is a Zacks Rank #2 (Buy). It is expected to grow earnings by 153% this year and 18.7% next year.

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