Will Yum! Brands Deliver Tasty Results?

Yum! Brands (NYSE:YUM) is heading into its fourth-quarter earnings report on February 5 with mixed sentiment. The company’s stock chart is still haunted by tremendous cliff at the end of November, when it provided full-year 2012 guidance of of $3.24 per share, or 13 percent growth, which was below analyst expectations at the time.

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Shares plummeted 10 percent as a result, and haven’t yet fully recovered. The stock is still off over 12 percent since then, and has trended lower and lower. Analysts downwardly revised their estimates and are now looking for fourth-quarter earnings of $0.82 per share, 9.3 percent year over year growth, on flat revenue of $4.12 billion.

Quarter Dec. 31, 2011 Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012*
Revenue ($) in millions 4,111 2,743 3,168 3,569 4,120
Diluted EPS ($) 0.75 0.96 0.69 1.00 0.82

*Consensus estimate.

KFCMeanwhile, competitors like McDonald’s (NYSE:MCD) have been on a tear, climbing nearly 10 percent over the past three-month period. Shares of Chipotle Mexican Grill (NYSE:CMG) are up 16.6 percent for the same period, even after being obliterated twice since the start of 2012.

One of the major issues facing Yum! Brands, which owns the KFC brand, is a tainted-chicken situation in China, where it pulls as much as 44 percent of its revenue. The Shanghai Food and Drug Administration launched a probe into the company’s chicken suppliers after finding unacceptable levels of antibiotics in nearly half of tested samples. Some of the same suppliers who also provided chicken to McDonald’s have already been shut down as a result of similar investigations.

The public-relations blow comes at a time when China’s economy is re-entering an upswing, and growth in the region is a critical part of its overall strategy. The investigation is expected to handicap its ability to compete against domestic rivals like Dico and Aijsen.

Yum! Brands, Inc. Stock Chart - YUM Interactive Chart - Yahoo! Finance

Yum! Brands is already feeling the negative impact of the investigation. Same-store sales in China are reportedly down 6 percent for the fourth-quarter, after climbing 6 percent in the third quarter. Recent checks suggest that sales growth is climbing at the beginning of 2013, but with 44 percent of revenue coming from the country, a fourth-quarter drop could cut deeply into earnings.

Full-year earnings expectations for Yum! Brands have moved in line with the company’s guidance of $3.24 on a 7.7 percent increase in revenue to $13.59 billion.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 11,300 10,840 11,340 12,630 13,590
Diluted EPS ($) 1.96 2.22 2.38 2.74 3.24

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