Yum! Never Expected Being Slapped With a Rubber Chicken

Josef Ray is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When good things happen, sometimes the bad just sinks in at the least expected moment. Though this scenario does not happen much to global-scale businesses, especially those that have planned to expand markets in larger market spheres, one just cannot fathom the application of this case with what actually happened to two of the great food companies in Mainland China. Just imagine the scenario that when things have been doing fine, a sudden change just messed things up big time.

What New Hope Actually Ruined

What can upset a food marketer’s stronghold, one might ask. And do “best stocks” fall also if the overall market is down? Yum! Brands (NYSE: YUM) can answer both drawing from its recent learning experience in China where their business outlook was made weak by an “adverse publicity associated with a government review of China poultry supply - and the corresponding significant impact on KFC China during the last two weeks of December”. It was alleged that New Hope Liuhe Company, the largest poultry vendor in China and supplier of chicken for both Yum and McDonald’s (NYSE: MCD) sold chicken that was fed antibiotics and growth hormones, prompting both food services giants to quit buying meat from them. Although the supplier has closed its plant and the government of China is investigating the case and has imposed stricter regulations to prevent such from happening again, the damage has been done and Yum sales took a beating, plunging shares nearly 5%. In the same manner, McDonald’s also traded lower than expected.

China is Just a Piece of the Pie

As most investors know, Yum Brands develops, operates, franchises, and licenses over 37,000 restaurants, which prepare, package, and sell a menu of priced food items. They operate in more than 120 countries and territories. Yum Brands owns KFC, Pizza Hut, and Taco Bell, which are world-renowned quick-service restaurants that serve chicken recipes, pizza, and Mexican food respectively. They have five business segments namely: YUM Restaurants China, YUM Restaurants International, Taco Bell US, KFC US, and Pizza Hut US. The company has a P/E ratio of 19.9, above the S&P 500 P/E ratio of 17.7. Although their name was temporarily tainted in China, they were the first to make an aggressive move into Asia by opening KFC stores there. Yum considers China an increasingly important market and it is currently operating 4,000 KFC restaurants and 750 Pizza Huts there, fully recognizing the future growth in the world’s second largest economy. Starbucks will follow their lead as they plan to open a coffee store in Vietnam and expand operations from there.

The Show Must Go On

Despite unexpected setbacks that temporarily stunted revenues, majority of financial analysts rate Yum Brands a buy. The company’s strength is manifested in multiple areas such as its revenue growth, notable return on equity, good cash flow from operations and increased stock price and an impressive growth record of earnings per share. Its net income increased by 23%, going from $383 million to $471 million. Comparison of return on equity with other rival companies in the Hotels, Restaurants & Leisure industry also shows that Yum Brands exceeds the industry average and the S&P 500.

Final Take on the Scenario

It was a good thing that Yum! Brands has established its portfolio well in the rest of the world. Otherwise, the major demise in China could have been a big ruin for the company that it would take some time to actually recover from the damage that the bad chicken created. So despite of the ruckus, Yum is still doing well and still performs at its best in an industry that should be hard to keep down. The company’s performance in the market indicated that such an event may be so ordinary to a business that has been well-known in the global business food chain.

JosefRayDagatan has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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