Why Yum! Brands Shares Plunged

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of fast-food king Yum! Brands (NYSE: YUM  ) were upsetting investors' stomachs today, falling as much as 10% on news that its growth in China may slow.

So what:  Releasing its 2013 outlook, management said it expected to deliver EPS growth of at least 10%, on top of the estimated $3.24, or a 13% increase, this year. However, the company said it now believes same-store sales growth in its Chinese locations, which have been contributing the bulk of its profit, will drop to -4% in the fourth quarter, following a 21% jump in the quarter a year ago. In its "ongoing earnings growth model," the company still sees mid-single-digit comparable-sales growth in China, so it seems to view this as just a temporary setback.

Now what: The slowdown in China may be a sign of general weakness in the world's No. 2 economy, whose blistering growth finally appears to be receding. Shares of Yum!, the parent of KFC, Taco Bell, and Pizza Hut, had been selling at a fairly steep P/E of 22 before today's drop, so much of this fall could have been valuation-based. Still, the company plans to open 1,800 new restaurants next year on top of the 1,800 it will open in 2012, so it should be able to meet its guidance primarily through expansion. For investors, it looks like the worst is over. Today's plunge seems like a one-off event rather than a reason to change your investing thesis.

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10/20/2016 4:00 PM
YUM $86.20 Down -1.04 -1.19%
Yum! Brands CAPS Rating: ****