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Not lucky in Kentucky: Yum plunges nearly 10%

November 30, 2012: 12:32 PM ET
taco-bell-pizza-hut-yum-blog

Shares of Yum! Brands fell on concerns about slowing KFC sales in China. But are investors overlooking strength in Taco Bell and Pizza Hut in the United States?

Investing 101: If a stock is priced for perfection, bad news is going to cause a rush for the exits. That definitely was happening with fast food giant Yum! Brands (YUM) on Friday.

Even though the company reaffirmed its outlook for 2013, investors were spooked by an alarming 4% decline in same-store sales in China. Yum has focused heavily on China, particularly through its KFC franchise.

Shares fell nearly 10%. An overreaction? Maybe not. Prior to the company's announcement late Thursday, Yum shares were trading at 20 times 2013 earnings forecasts. That is extremely expensive for a restaurant stock. McDonald's (MCD), by way of comparison, was trading at just 15 times profit estimates for next year.

http://markets.money.cnn.com/services/chartbuilder/livechart.asp?SSS_99794628B3719F9C26B81A2739F41BBE

The sell-off in Yum is a bit reminiscent of the recent slide in rival Chipotle (CMG), which competes with Yum's Taco Bell brand. Chipotle shares plummeted after its latest earnings report due to worries that sales were slowing. Like Yum, Chipotle was trading at a huge premium to Mickey D's and many other restaurant stocks.

But traders on StockTwits are more nervous about the Yum news because growth in China is critical to the company's continued success.

tradefast: $YUM getting smacked - company sees 'shocking' deteriation in China (china is 45% of Ebit)

Vconomics: $YUM says Q4 sales in China will decline 4%. The last time $YUM reported a decline in China same-restaurant sales was in Q4 of 2009. #Wow

This is obviously not good. Making matters worse for Yum is the fact that China's woes may not be confined to just one quarter. There are growing concerns about the health of China's economy .. as one trader sarcastically points out.

fundmyfund: $YUM slashes forecast, and Chinese stock market at multi year lows but no worries, Wall St strategists say soft landing

Investors have to hope that China does avoid a hard landing. That's because the rest of the world is not looking too pretty either.

HowardWPenney: Are global restaurant companies a proxy for the global economy? $YUM negative SRS in China and $MCD in the USA and Germany! #GrowthSlowing

Still, some traders think that investors shouldn't panic. After all, China is just one part of the Yum story. Other franchises continue to do well. And Yum also pays a solid dividend.

TraceyRyniec: Taco Bell sales MUST be awesome this qtr for $YUM to keep its guidance. The Dorito Locos is saving the company.

Orthokneepa: $YUM Just bought for IRA. Tucking this away for a while. 2% div and China growth isnt going away. Zoom out more then 2 minutes here folks

That is a nice reality check there. Yum is still a solid company. But as I suggested before, shares may have been a little too pricey heading into its earnings report. The pullback may make the stock as appetizing as Top Chef Masters' Lorena Garcia's new Cantina Bell menu! ("Lose the tortilla!")

Finally, it's time for the Reader Comment of the Week. As a diehard Yankees and Giants fan, it pains me to praise a guy from Boston. But Chrisitan Koulichkov, aka BostonBroker33 on Twitter, wins his unprecedented third RCOTW award of 2012 for this gem about the recent rally in Research in Motion (RIMM) in response to Thursday's zombies of tech column.

Brilliant. This child of the 80s loved the reference ... even though the thought of decaf coffee makes this java snob cringe. Speaking of cringing, watch this hilarious Brim commercial.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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