Yesterday I posted that Monsanto’s (MON) ugly earnings report provided important guidance for navigating earnings season. Wall Street analysts are projecting a 6.9% drop in third quarter earnings but that decline won’t be spread evenly across all market sectors. Energy stocks will, of course, see a big drop in earnings but, according to Standard & Poor’s, sectors such as telecommunications, technology, consumer discretionary, and health care will see growth of 10% or better.
Now we get a further bit of navigational advice from Yum! Brands (YUM). On Tuesday, after the market close, Yum! Brands reported earnings of $1 a share, 7 cents lower than Wall Street estimates, and revenue of $3.43 billion instead of the projected $3.67 billion.
But what is important for navigating this quarter’s earnings season was the market reaction to this miss.
Companies miss earnings projections by 7 cents or about 6.5% all the time. It’s never good news.
But seldom do stocks get taken out and shot for a 6.5% miss.
And that’d exactly what the market did to Yum! Brands. The shares closed at $83.42 on Tuesday before the earnings report and then plunged Wednesday after the open to $68.09 as of 10 a.m. New York time. That’s a drop of 18.5%.
Now there’s no doubt that Yum! Brands disappointed pretty much across the board. Same store sales in China, which accounts for about one-third of Yum’s operating profit, grew by just 2% instead of the projected 9%.
But Yum! Brands real offense was disappointing the market in some of the places where the market is most susceptible to fear.
Financial markets are worried about slowing growth in China? Yum’s results raised the possibility that growth in China had slowed so much that the company’s revenue would never completely bounce back from the food-safety scandals that had devastated sales. With growth in China slowing, what if Yum’s food safety scandals had destroyed the brand with Chinese consumers? Forever!
The other fear that hit Yum like a cold burger patty in the face was worry that growth in the fast food sector was over Forever! McDonald’s (MCD) revenue line has been essentially flat for four years. The sector is battling perceptions that its customers have moved on to better quality food and are looking for something other than gray burgers and overly salty chicken. What if the sector is never coming back?
Never is a long time and it’s a good bet that the fears about the future of Yum sales in China and about the death of the fast food sector are somewhat overblown. That’s what happens in a panic.
But the larger point for investors during this earnings season is that the markets are littered with land mines that are just ready to blow up on any company that steps on one. China growth slowdown is obviously one such land mine and Yum! Brands won’t be the last company to trip that mine this quarter. Falling commodity prices make up another mine—I’d look out, especially, for oil, copper and iron ore. The strong dollar is a third—look for exporters that live up to fears that a strong dollar will decimate sales. I’m sure there are others—falling prices in the drug sector as a result of political and regulatory scrutiny, for example. I’m sure you can make up your own list of land mines and the companies most likely to step on them.
YUM! Brands (YUM) is moving back toward normal in China, according to second quarter earnings announced after the market close today.
But is “normal” enough for a stock that’s trading—even while the China problem continues to hurt sales—near an all-time high?
At the end of 2012 sales at YUM! Brand’s KFC stores in China fell off a cliff when government officials discovered that some suppliers had fed their chicken more antibiotics than permitted under Chinese rules. By April 2013 sales were down 29% from April 2012.
In the months since sales have clawed their way back toward normal. In May sales were down just 19% from May 2012. In June, the company announced today, the decline had been trimmed to just 10% year to year. And, the company continued, by the fourth quarter of 2013 growth in China will have turned positive.
For the second quarter the company announced earnings of 56 cents a share, two cents a share better than Wall Street projections. Sales came in at $2.9 billion, slightly short of the $2.93 billion consensus, and an 8.3% drop from the second quarter of 2012.
What’s hard to tell from these results—and what has been hard to tell about YUM! Brands ever since the hatching of the China chicken disaster—is what is the underlying growth trend for YUM! Brands. Before the huge drop in sales in China overwhelmed all the other numbers from the company, YUM! Brands was showing strength on a turnaround at its Taco Bell stores.
But the company faced important questions about future growth. Read more
Today’s announcement of February same store sales from McDonald’s (MCD) shows what the company has been up against in the last few months. Same store sales fell 1.5% in the month from February 2012. That compares to a 7.5% year over year gain in same store sales back in February 2012.
But today’s news also signals the coming end of the McDonald’s year-to-year comparison problem after March or so. Read more
The Shanghai Food and Drug Administration concluded its investigation into chicken sold by Yum! Brands KFC stores in China on January 25, the company said in today’s, February 4, fourth quarter earnings release. The Chinese agency did not fine the company or decide to bring a legal or regulatory case for higher than permitted levels of antibiotics in chicken sold by KFC from supplier Liuhe Group.
That doesn’t mean that investors, though, have cleared the company. The stock fell 1.99% today before the earnings report and then another 5.38% in after-hours trading post for a total loss on the day of 8.2%.
The problem wasn’t fourth quarter earnings—the company actually beat expectations by a penny—or revenue—at $4.15 billion slightly ahead of the $4.12 consensus. Read more
A jump in December sales looks like it bailed out McDonald’s (MCD) fourth quarter earnings, reported today. Earnings climbed to $1.38 a share from $1.33 in the fourth quarter of 2011. Wall Street analysts were looking for $1.33 a share.
Analysts had forecast a 1.8% drop in December same store U.S. sales and instead the company reported a 0.9% gain.
The question, if you own McDonald’s (the stock is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ ,) is why? Do December results represent a one-time boost from company’s decision to keep more stores open on Christmas than in 2011 and a shift of a limited-time offering of the popular McRib sandwich to December? Or is there something more lasting in the unexpected December increase?
Actually, it looks like the December surprise might be the result of price cuts that McDonald’s implemented in November that opened a small but significant gap between McDonald’s and its competitors. The November price cuts came to about 0.75 percentage points. That kept the company’s price increase for the entire third quarter to 2%, according to Credit Suisse. That looks like it was significantly below price increases in the category.
This doesn’t change the calendar on the tough year-to-year comparisons that McDonald’s faces in the beginning of 2013. The earnings increase in the first quarter of 2012 from the first quarter of 2011 came to 6.9% and I don’t think there’s any way that McDonald’s matches that kind of growth in the first quarter of 2013. In its conference call the company said that it expects global same-store sales to decline in January.
If you own these shares, you own them for the easier year-to-year comparisons that set in after the March quarter.
All the same, McDonald’s unexpectedly strong showing in December looks to me like a sign that the company has limited the last half of 2012 resurgence of competitors such as Burger King (BKW) and Yum! Brands’ (YUM) Taco Bell.
As of January 23, I’m leaving my target price at $104 a share.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of McDonald’s as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/