Yum! Brands Inc. (NYSE:YUM) released a disappointing earnings report yesterday afternoon that caused a massive drop in value in after market trading. The major problem with the report appears to be the firm’s flagging numbers in the Chinese market. About half of Yum! sales come from the Asian giant, and growth there is expected to justify its large valuation.


Yum! Brands Inc. (NYSE:YUM) revealed that it earned 33 cents per share, including a 55 cent per share write down for Little Sheep, a Chinese food company. Analysts were expecting the company to show earnings of 93 cents per share in the report. The miss wasn’t the biggest problem, however. The problem is the source of the worse results.

Yum problems in China

Yum! Brands Inc. (NYSE:YUM) is the most successful Western fast food company in China. It’s had its problems int he country, but it’s always managed to get through them. A slow down in the Chinese consumer economy will not be an easy thing to get through, and Yum will not be expected to grow as it has in past years.

A report from Barclays rates Yum! Brands Inc. (NYSE:YUM) at Equal Weight, and puts a price target of $68 on the stock, down from a previous target of $72. After earnings were announced the market drove the shares down by around 7.5% to open at $65.84 this morning.

China is underperforming for Yum! Brands Inc. (NYSE:YUM), but the company expects a full recovery next year. The Barclays analysis suggests that is an optimistic thought, given the difficulty in predicting what will happen in China. Yum! Brands Inc. (NYSE:YUM) says that EPS will be 20% higher in 2014, assuming China recovers.

Yum! valuation hit

Yum! Brands Inc. (NYSE:YUM) had a high P/E ratio before these earnings were announced because investors were expecting the company to outperform in the Chinese market. The fast food company was ahead in what was seen as a vibrant new place to sell fried convenience foods.

This morning’s market puts Yum! Brands Inc (NYSE:YUM) P/E at just over 21.5. The company is still highly valued for one that sells fast food, but its December earnings report will be a dangerous event for traders to play. If China continues its distaste for KFC, investors stand to lose a lot of money at Yum! Brands Inc. (NYSE:YUM)