Be sure to check out our detailed stock analysis (click here). With all the uncertainty around China, should Yum! Brands (NYSE: YUM) be a short candidate? Perhaps not enough downside risks have been built in for Yum!'s exposure to China, where over 50% of revenues are generated.
The recent news driving Yum! down was the fact that KFC China's suppliers overloaded its chicken with chemicals to expedite growth (see why Yum! is trying to fix China). Yum! remains unsure about how long it will take to recover sales at KFC in China, with management expecting weakness in China to deliver an expected drop of 25% in same store sales for the first quarter of 2013.
This recent event might be unveiling a bigger issue, brand erosion in China. Not only this, there are other regulatory issues related to operating in China. The slowing Chinese economy will also put pressure on the company, all of which have compelled management to offer guidance of low to mid-single digit earnings per share decline in 2013, opposed to its long-term target of at least 10% earnings growth.
While shorting any stock is risky, given there's limited upside and unlimited downside, I would rather avoid Yum! and invest in one of the other top performing fast food chains. Question is; which one?