Feathers Ruffled Again at Yum! Brands, Inc.

A new avian flu outbreak in China risks sending the restaurant chain's stock to the broiler.

Jan 28, 2014 at 10:45PM

It was the outbreak of avian influenza last year that contributed to a yearlong skid in China by Yum! Brands (NYSE:YUM), as its KFC division reeled from the spread of the virus that followed revelations of its own tainted chicken. The fast-food chain saw same-store sales plunge month after month, and it was only this past December that it was finally able to record its first month of positive comps in more than a year. 

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All that's in jeopardy now, however, because a new outbreak of AI has caused authorities in eastern China to ban live poultry sales as the number of people infected with the H7N9 strain of bird flu is on the rise. As it derives just over half its revenue and 44% of its pre-tax operating profits from China, and with 20 people dying already in 2014 out of almost 100 infected with the virus, Yum! Brands may find its stock running around like a chicken with its head cut off.

Earlier this month, the Centers for Disease Control reported that Canada had the first case of human infection of H5N1, the first time the avian influenza A virus has ever been detected in the Americas. While the case involved a traveler who had recently returned from China, it's significant because H5N1 infections are rare, since it doesn't spread easily from person to person. In fact, of the 648 human cases of H5N1 infections that have been detected since 2003, most occurred in people who had close or direct contact with poultry.

This should be a warning bell not only to U.S. protein producers such as Tyson Foods (NYSE:TSN), which is looking to boost sales by 12% to 16% annually over the next several years through greater overseas production, particularly in China, but also restaurant chains such as Yum! and McDonald's (NYSE:MCD), which count on chicken for large portions of their revenues. Consumers could shun chicken consumption by making fewer restaurant visits or purchasing chicken less at retail, but it could also result in reduced export activity. 

Chicken has become more popular recently because of the rising cost of beef and pork, but Fitch Ratings has warned that similar pandemics in the past took a toll on operating earnings and cash flows of processors and restaurants alike, so we may see a similar recurrence now.

It's an already dicey situation for Yum!, which was left wobbling from last year's debacle, but if this situation spreads further it could be seriously damaged. The Xinhua News Agency reported that cities in the eastern Zhejiang Province, which has reported dozens of infections, halted live poultry trading and is enacting emergency monitoring of poultry farms, as is Shanghai, which will ban live poultry trading from Jan. 31 to April 30. The city of Hangzhou is planning to close all live poultry markets for good, instead promoting the supply of frozen poultry products.

With Yum! Brands experiencing new issues at its Pizza Hut division -- same-store sales turned negative in December -- the last thing it needs is a new bird flu probably that will have customers flying the coop again.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends and owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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