YUM Brands has been exhibit A for some of the difficulties of doing business in China. The company has been hit with one food safety concern after another in the past 2 years, and the stock has stagnated in that period as a result:
YUM’s food safety issues in China have morphed from understandable one-offs to a major long-term concern for the restaurant brand, which gets above half of its total revenues from the Chinese market. The company was first investigated for tainted chicken supplies from late 2012, and then was hit with a decline in demand from a bird flu outbreak in China in the spring of 2013.
The latest revelation occurred in July, when YUM had to suspend a portion of its meat purchases, as reported by the WSJ:
The U.S. owner of a meat supplier in Shanghai apologized and promised a swift response Monday after McDonald’s Corp. MCD and Yum Brands Inc. YUM suspended purchases in China in the wake of allegations it sold expired chicken and beef to restaurants.
McDonald’s and Yum, parent of KFC and Pizza Hut, said they halted orders from Shanghai Husi Food Co., owned by OSI Group Inc. of Aurora Ill., after local Chinese media reported that Shanghai Husi was selling meat products beyond their shelf life.
The stock declined 7% on earnings on July 17th from near an all-time on an in-line report, as fast food sales trends were tepid. However, the continued selling was a result of the meat supply issues reported on July 21st, and the stock has traded below its 200 day moving average ever since:
McDonald’s and YUM have both acknowledged that Q3 sales have been hit in China by the supplier issue. With that overhang, I’d be surprised if YUM can get above $75 in the near term, even as the valuation continues to look quite cheap (21x P/E for 15% expected earnings growth). Given all the supply issues, the recent selloff seems to be a sign that investors are not willing to take another chance on the latest YUM Chinese turnaround.