Can A Cool Ranch Taco And North American Success Fight Off Chinese Worries For YUM Brands?

| About: Yum! Brands, (YUM)

Shares of Yum Brands (NYSE:YUM) were hit hard on more global growth fears. Yum, the parent company of Taco Bell, Pizza Hut, and KFC, has seen sales decline in China after worries over the company's chicken product. New guidance from YUM Monday sent shares down over 5% in after hours trading and now has the stock back on my radar.

It seems the tables have turned on Yum Brands. The company was once seen as a growing international company with declining brands and stores in North America. Now, China sales are dropping and the growing same store sales in America are carrying the company.

On Monday morning, Yum Brands warned once again on fears of lower Chinese sales. The company now expects to post a 6% drop in same store sales in the region. This is down from an already updated guidance of -4%. Yum Brands did say they remain on track to hit targeted earnings per share of $3.24.

On January 2nd, Taco Bell posted a picture on its Facebook page that now has the internet community buzzing. A picture that combined the company's popular taco and a bag of Doritos Cool Ranch chips would seem to be foreshadowing for the next flavor of Doritos Locos Taco. The post was listed with the caption "Anything could happen in 2013". Taco Bell's Facebook page has 9.5 million likes. This particular photo received over 130,000 likes, over 12,000 shares, and also drew 9,000 comments.

A Cool Ranch Doritos Locos Taco would follow up on the extreme success of the company's original concept combining a signature taco wrapped in shell made out of Doritos. The taco sells for $1.29, a $0.30 increase from a regular taco at the restaurants. I discussed this product last year and said at the time that the company had been testing other flavors, including cool ranch. Launched in June, the Doritos Locos Taco went on to become the most popular launch in company history. Over 100 million were sold in a ten week period. In August, the company announced it had passed the 200 million milestone.

The Doritos project could be in its early stages. There are over 100 different flavors for Doritos, a chip brand owned by Pepsi's (NYSE:PEP) snack foods division. Taco Bell will continue to experiment with different flavors and create unique products based on the Doritos chips. This also bodes well for former Yum Brands owner Pepsi.

During the MLB Playoffs, Yum Brands launched a promotion offering fans a free Doritos Locos Taco if a player stole a base during the World Series. Sure enough, one of the San Francisco Giants players stole a base, and everyone in America got one free taco. This was a great promotion for Taco Bell as it hit several marketing areas. The company had its name and new taco brand broadcast on television to millions of viewers. People who had never tried the new creation finally got to have one. People who enjoy the Doritos taco likely purchased other items while at Taco Bell restaurants collecting their single free taco.

Along with the Doritos tacos, Taco Bell continues to ramp up its menu to take rivals Chipotle (NYSE:CMG) and Qdoba (NASDAQ:JACK) head on. The company's Cantina Bell menu continues to do well, led by famed chef Lorena Garcia.

Recently, Jim Cramer even suggested that Yum Brands should split its company into two. The company could separate its foreign division from its North American operations. The move would be similar to when Altria (NYSE:MO) spun off Phillip Morris International (NYSE:PM). Altria maintained the declining North American brands while also paying out a healthy dividend. The foreign company then had the growing markets for cigarettes and focused more on sales and acquisitions than dividend yield. A move by companies to split international assets recently also includes Kraft (KFT).

In the company's third quarter, Yum Brands reported a sales increase overall of 6% and earnings per share of $0.99. All three American segments saw positive same store sales growth. Taco Bell (+7%) outpaced Pizza Hut (+6%) and KFC (+4%). Taco Bell appears to be gaining market share in the Mexican food segment from its rivals. Taco Bell stores in America are only a piece of the puzzle for Yum Brands, but if the company splits up, they would become a huge focus for investors.

Shares of Yum Brands now trade at $64.40 and are approaching fifty two week lows ($59.58). Analysts expect the company to earn $3.26 for the current fiscal year. In 2013, analysts see the company posting earnings per share of $3.69. It seems bullish that the company is still forecasting to hit their earnings per share targets with a huge decline in Chinese sales. I'm guessing this is because of strong North American sales once again, like in the third quarter. Hopefully in 2013, Yum Brands will figure out a way to split up its company and create value and growth for shareholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.