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Bear of the Day

A more robust economy has pushed many investors back into high beta stocks. Leading the way in this regard were many consumer discretionary firms, which have had a great start to 2013.

However, this trend hasn’t been universal by any means, as one of the larger, and more famous companies in the space, YUM Brands (YUM - Analyst Report), has had an awful beginning to the year. The firm’s stock has slid by nearly 5% in the year-to-date period, and it has fallen by double digits in the past three months.

This compares extremely unfavorably to both the broad market, and the consumer discretionary space as a whole by a pretty wide margin. In fact, broad markets have risen by about 10% in the time frame, suggesting a huge level of underperformance by YUM in the time frame.

YUM in Focus

YUM is best known for its three major restaurant divisions, all of which are household names at this point. KFC, Pizza Hut, and Taco Bell, all operate in the quick-service market and compete with the likes of McDonald’s (MCD - Analyst Report), Burger King (BKW - Analyst Report), and Wendy’s (WEN - Analyst Report), among others.

These diverse companies have long been winners, powering YUM shareholders to big gains over the past few years (over 25% in the past two), even when including the recent slump. However, the firm has had trouble breaking out above $75/share in the past nine months, and now recent worries make this figure seem like a truly impossible figure to hit any time soon.

Earnings Trends and China

The Louisville, Kentucky-based company had decent enough earnings in its most recent release, surprising higher by about 2.5%, but all investors cared to focus in on was China. The nation actually accounts for over two-fifths of all YUM operating profits already, so any new reports out of China seems poised to control the stock.

This is why recent government reports have been so hurtful to the stock, and why many analysts are ratcheting down expectations for the firm in the short-term.

What Happened in China

According to YUM, some poultry farms in China that were suppliers of KFC China were using excessive levels of antibiotics in their chicken. The resulting media frenzy hurt KFC sales across the country to close out the fourth quarter, and they have arguably impacted the firm’s brand name going forward as well.

Things got so bad that KFC sales in China cratered by 41% in January, suggesting a huge drag on earnings, so long as this issue hangs over the company.

Outlook

Analysts have taken note of this situation and have pushed the consensus for the current quarter down from 88 cents a share 90 days ago, to just 67 cents a share today. Furthermore, nine of the 17 analysts covering the stock slashed estimates in the past 30 days—and not a single one raised their estimate—suggesting complete agreement on YUM’s prospects going forward in the near term.

For this reason, YUM currently has a Zacks Rank of 5 or ‘Strong Sell’, even though it is in a favorably Ranked Industry. If anything, it seems as though YUM is dragging down the restaurant sector and that there are plenty of better choices out there for investors, even if they want to stay in the food space.

Based on how bearish things have been lately in China, the near term downward trend could continue for this troubled company. It might be better to look to other names in the space, at least for the time being, until YUM can get its act together and restore its battered image abroad.

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