Does Yum! Brands Support Higher Prices?

With shares of Yum! Brands (NYSE:YUM) trading around $72, is YUM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Yum! Brands is a quick-service restaurant company based on a number of system units, with approximately 37,000 units in more than 120 countries and territories. The company — through its three main restaurant chains KFC, Pizza Hut, and Taco Bell — develops, operates, franchises, and licenses a worldwide system of restaurants. These popular food chains prepare, package, and sell a menu of low-priced food items. Convenient and tasty foods continue to rise in popularity worldwide, which allows Yum! Brands to provide food items demanded by consumers worldwide.

KFC restaurants in China account for a large portion of Yum! Brands’ profits. An avian flu scare in China has caused the company to struggle in the last quarter, and the company is expected to present disappointing earnings after the bell today. However, the company predicts a turnaround in the fourth quarter as the bird flu scare dies down. Through the company’s various segments, Yum! Brands will continue to supply its consumers around the world with quick and tasty food items for many years.

T = Technicals on the Stock Chart are Strong

Yum! Brands stock has been on a powerful surge higher over the last few years, and the stock has been consolidating near all-time high prices over the last year. Analyzing the price trend and its strength can be done by using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Yum! Brands is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

YUM

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Yum! Brands options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Yum! Brands Options

27.63%

66%

64%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is average demand from call buyers or sellers, and low demand by put buyers or high demand by put sellers — all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts, and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions can help gauge investor sentiment on Yum! Brands’ stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Yum! Brands look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-25.00%

-3.09%

25.00%

6.15%

Revenue Growth (Y-O-Y)

-7.58%

1.02%

9.01%

12.50%

Earnings Reaction

7.01%

-2.90%

7.49%

0.47%

Yum! Brands has seen mixed earnings and mostly rising revenue figures over the last four quarters. From these numbers, the markets have been pleased with most of Yum! Brands’ recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Yum! Brands stock done relative to its peers, McDonald’s (NYSE:MCD), Wendy’s (NASDAQ:WEN), Jack In The Box (NASDAQ:JACK), and the overall sector?

Yum! Brands

McDonald’s

Wendy’s

Jack In The Box

Sector

Year-to-Date Return

8.31%

12.98%

28.51%

41.99%

22.78%

Yum! Brands has been a relatively weak performer, year-to-date.

Conclusion

Yum! Brands owns and operates KFC, Pizza Hut, and Taco Bell restaurants around the world. The company is expected to report disappointing earnings after the bell due to an avian flu scare in China. The stock has been on a powerful move higher over the last few years, but is now consolidating. Over the last four quarters, investors in the company have been pleased since earnings have been mixed and revenue figures have been mostly rising. Relative to its peers and sector, Yum! Brands has been a weak year-to-date performer. WAIT AND SEE what Yum! Brands does this coming quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.