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A shortage of tortillas at fast food chain Taco Bell is effecting the chain's menu in some parts of the country and could weigh on parent Yum Brands' stock temporarily, according to Bank of America Merrill Lynch.
The firm lowered its Taco Bell's third-quarter same-store sales to a 1% decline due to the supply issues.
"[The] 10-inch tortilla shortage should be [a] near-term headwind," Bank of America Merrill Lynch's research analyst Gregory Francfort said about Yum Brands in a note to clients on Monday.
Last week, media reports came out that the Mexican food chain had a shortage of its 10-inch tortilla, which is used in products like burritos, quesadillas, grillers, and quesaritos, making up about 30% to 40% of entrees on Taco Bell's menu, Francfort said.
"We note that the supply shortage should only be temporary creating an easier 3Q20 lap...but also note the long-term risk seems to be at breakfast where the 10-inch is utilized more heavily and where we suspect volumes are only at questionably break-even profitability levels," said Francfort.
Despite noting the headwind for Taco Bell and Yum Brands, Bank of America raised its price target for Yum Brands to $110 from $103 and reiterated its neutral rating. The new target is right about were the shares were trading on Tuesday.
The firm also raised its 2019 earnings per share "modestly" to $3.83 from $3.80 as the "franchisor's valuations have recently spiked on the prospect of lower rates caused by softer economic data," Francfort said.
Shares of Yum Brands, which has a market value of about $33.7 billion, suffered after the company reported its first-quarter earnings in March and announced same-store sales that came in lower-than-expected.
Yum Brands's stock is down less than 1% since reports of the shortage. Shares are up about 20% since the start of the year.
"While some Taco Bell restaurants are experiencing supplier shortages, we are working diligently to replenish the supply of our tortillas (used for products like quesadillas and burritos) in those restaurants and encourage fans to try any of our other delicious menu items like the Power Menu Bowl or Cheesy Gordita Crunch in the meantime," a Taco Bell spokesperson told CNBC. "We apologize for any inconvenience this might cause and appreciate our customers' patience."
—with reporting from CNBC's Michael Bloom