Once considered a terrific international play because of its presence in China, what do you do with Yum! after such a lousy growth forecast?
On November 30th the parent company of KFC, Taco Bell and Pizza Hut sent the bulls into a tailspin with their latest commentary about the business in China.
They projected a 4% decline in Chinese same store sales for the fourth quarter.
However, last Thursday at the company's annual analyst day the sentiment was much different. "At this meeting, management painted a more bullish long-term picture when it comes to China," said Cramer.
Is Yum! a sell with its China business badly overvalued? Or does Yum! remain a buy, as a beneficiary of China's long-term growth prospects?
"If YUM is truly slowing in China, if this latest decline in same store sales is not temporary but actually permanent, if the People's Republic has simply gotten sick of Kentucky Fried Chicken and Pizza Hut, then this stock could be untouchable for a long time."
"I don't think that's the case," said Jim Cramer. Here''s why:
- Smaller Cities: "YUM is expanding from the larger urban centers to China's many smaller cities. That suggests it's still very popular. And in smaller cities there's less competition."
- CEO Optimism: "At last week's analyst day, YUM's management was quite bullish about the long-term prospects of their Chinese business, and I believe them. The CEO, David Novak, said, "if the sky is falling in China, I promise I will know about it before you and I will let you know." Novak's a real straight shooter and he definitely has a better read on China than we do, so if he says the sky isn't falling, I think it makes sense to give him the benefit of the doubt."
- China Stimulus: "You have to remember that China's economy had been decelerating, but now it's begun to turn the corner thanks to smart interventions from the Chinese Central Bank."
- Beijing Boost: "The Chinese communist party just got new leadership, and they've committed to growing their country's GDP by 7% annually through the year 2020 while doubling per capita income by the end of the decade."
What's the bottom line?
"I believe the Chinese government will do whatever it takes to get the economy moving and moving fast, and that's good news for YUM," said Cramer. I think the bulls are right and the bears are letting a short-term Chinese speed-bump scare them away from a great story.
However, Cramer added a caveat that he said could really get shares moving.
"If YUM wants to get a higher share price, I think the company should break itself up and spin off the international business as a separate entity, just like Altria did with Phillip Morris International in 2008," he said.
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