Yum Brands shares are trading like the company is experiencing a 'doomsday scenario' in China

Markets have been nervous about China’s economy for a while now.

And on Tuesday, Yum Brands gave everyone a new reason to.

The company reported third-quarter earnings and sales below expectations after the market close on Tuesday, and it slashed its forecast for full-year earnings. It now expects earnings per share growth to be barely positive.

The company also mentioned that it is facing unexpected challenges in China.

Its stock has collapsed as much as 19% since the release.

In a note to clients on Wednesday morning, Oppenheimer analysts wrote,

“We have been bullish on YUM’s setup into year-end. In a frustrating release, low China trends were out-of-sync with management’s “significantly positive” disclosure at quarter’s end and earnings-per-share guidance was reduced. With stock below $US70 in after hours, the market now discounts China as a doomsday scenario with very little value, an understandable but well overdone reset in our view. We do lower EPS estimates and acknowledge China’s difficulties, but believe a separation is fully justified, executable and could prove extremely value-enhancing to investors at current levels.”

A key theme to watch this earnings season is the impact on earnings that China’s economy has on companies that are most exposed to the country. If there would be any spillover from China’s economic challenges to the US, one of the early places it would show up is in company income statements.

As Business Insider’s Mike Bird noted, China is transitioning from an investment-led economy towards a services-led consumer economy. And so, any sign of weakness in consumer spending does not look good.

The company, however, reported 2% same-store sales growth (at restaurants open for over a year), and 7% overall sales growth year-on-year.

But the uncertainty over China’s economy has put markets on edge for months now. And given Yum Brands’ dim outlook, the big sell off reflects that fear.

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