A Raymond James analyst lowered his rating on Yum Brands Inc. on Monday saying that the once highly-valued restaurant chain's stock may have already hit its peak and that the company faces a risky future ahead in China.
THE OPINION: Analyst Bryan Elliot downgraded his rating on Yum, which owns the KFC, Taco Bell and A&W brands, to "Market Perform" from "Outperform." This follows an 8 percent plunge in the company's stock price on Friday as part of the broader market's fall.
Elliot said that this year, the company's stock has traded at levels that were, by some measures, higher than just prior to the global recession that started in late 2007. The stock's sharp reversal Friday, in both price and volume, creates the risk of "a measurable period of correction for one of the strongest mega-cap stocks of the past decade," he wrote.
Yum is particularly at risk if there is a global recession, he wrote. The company has focused on growth in China to tap into a growing class of consumers who only recently have been able to afford go out to eat. Elliot estimates the company draws more than half its profits from China.
"Should the recent indicators of a global growth slowdown be accurate, we note there is no 'roadmap' for investors to follow to handicap the risks to Chinese consumer spending," Elliot wrote. "The current mass of middle-income Chinese consumers (has) never seen an income squeeze of magnitude since becoming discretionary consumers — thus it is guesswork to attempt to quantify the impact on Yum's China division, should Chinese consumer spending slow."
He said the company's cash flow could weather a global recession but that the stock at its current trading value cannot.
THE STOCK: Yum's stock price fell 67 cents to $64.03 in afternoon trading. After opening the year at $58.57 per share, it rose to a peak of $73.93 in mid-April, but started to slip in May and is now flirting with its lowest levels since February.
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