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Why Yum! Brands, Inc. Shares Slipped

By Brian D. Pacampara, CFA - Jan 9, 2014 at 2:01PM

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Does this analyst make a good case or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Yum! Brands (YUM -0.50%) sank 2% today after Morgan Stanley downgraded the fast-food giant from overweight to equal weight.

So what: Along with the downgrade, analyst John Glass lowered his price target to $77 (from $82), representing essentially no upside to yesterday's close. While momentum traders might be attracted to the stock's sharp rebound since October, Glass believes that Yum!'s prospects, particularly in China, are already baked well into the valuation. 

Now what: According to Morgan, Yum!'s risk/reward tradeoff is rather unappetizing at this point. "While we still see YUM as a best-in-class play on emerging market consumers, we see risk to the company's ambitious goals for a 40% profit recovery in China in '14," noted Glass. "It's not that this cannot happen, but we think the market is already discounting that it will happen (current consensus is calling for 24% increase in 14 EPS, above guidance of 20%)." With Yum! still trading at a P/E of 30, I'd agree that waiting for a wider margin of safety seems prudent. 

Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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