Not sure if this is a bug, but it's a bit of a gotcha.
If you have a texture tag selected and a child object, localize textures creates a new material and replaces the material on the selected texture tag. I expected it to apply a new material on the child object.
This is really an issue with tag selections in C4D and how barely anyone pays attention to them. The texture tag just happened to already be selected and I clicked the child object.
Perhaps if a child object is selected it should use that behavior first and the texture tag replacement as the fallback behavior?