Without the China engine the YUM story is less compelling. Whether it's a YUM analyst meeting, quarterly conference call or the CEO speaking on Jim Kramer's TV show (the stock is down 9.5% from the last appearance vs. the S&P 500 down 3.2%), all the company wants to talk about is China. The company recently hosted an analyst meeting in KY and they spent nearly 1/2 of a 1.5 day presentation talking about China. I question whether investors will be provided with this same level of disclosure now that the Chinese market is showing signs of stress? With all of the hype over China, it is easy to forget that nearly 50% of the company's operating profits come from the U.S.
- Including yesterday's performance, the Chinese market has declined -52% from its October 2007 peak and inflation is accelerating. YUM's senior management expects that commodity inflation (including higher chicken costs) will continue into the first half of 2008 and moderate later in the year in Mainland China. It appears that the company's expectations will need to be adjusted in the coming months.
- China is a black hole to most Americans and my guess is that most American companies don't properly risk adjust returns for the capital put into China - just ask Caterpillar Inc. (CAT). Today, CAT learned a big lesson about doing business in China! A story ran on the Dow Jones news wire that said the Xuzhou Construction Machinery Group is going to exit its JV with Caterpillar. President Wang Min is quoted as saying the company plans to sell its 15.87% stake in Caterpillar Xuzhou and set up its own excavation machinery unit. CAT is scrambling to try to figure out how to continue to cooperate with the Chinese company.
- We bring this up because YUM's partners in China are essentially state-owned enterprises. Despite having a majority ownership position, YUM historically has not consolidated any entity in China, instead accounting for the unconsolidated affiliate using the equity method of accounting. More disclosure?