Is Yum! Brands a Bargain Here?

With shares of Yum! Brands (NYSE:YUM) trading at around $62.08, 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:

C = Catalyst for the Stock’s Movement

Yum! Brands recently reported earnings that didn’t sit well with investors. However, if you look closely at how the news is being digested, the trend isn’t all bad. The stock was down 5.56 percent after-hours on Monday. On Tuesday, it looked as though the stock was having another off-day, but it actually recouped some of the losses from after-hours trading on Monday. The good news from the earnings report was that revenue and same-store sales were up. The bad news was the impact China KFC had on earnings.

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The Shanghai FDA has concluded that the chicken being served at China KFC had excessive amounts of antibiotics. Once this hit the news, a snowball effect took effect, aided by social media. Once this happened, the story was impossible to contain. As a result, KFC has been hurting. Yum! Brands has stated that it intends to rebuild the brand’s image. This situation will be covered further in the Conclusion section as it should weigh on any investor’s mind. For now, let’s take a look at some important numbers for Yum! Brands.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Yum! Brands and only scant progress is being made. The balance sheet is in negative territory. At least cash flow is strong.

Debt-To-Equity

Cash

Long-Term Debt

YUM

1.27

$776.00 Million

$2.94 Billion

MCD

0.95

$2.19 Billion

$13.26 Billion

CMG

0.27

$573.89 Million

$3.56 Million

 

T = Technicals on the Stock Chart Are Weak     

Yum! Brands has seen a good run if you look at a three-year time frame, but that momentum is now non-existent. To make matters worse, there is no dividend yield to help investors feel more at ease while waiting for gains. All that said, McDonald’s (NYSE:MCD) and Chipotle Mexican Grill (NYSE:CMG) have also underperformed the market over the past year or so.

1 Month

Year-To-Date

1 Year

3 Year

YUM

-8.68%

-6.04%

-0.91%

99.70%

MCD

5.67%

7.63%

-2.02%

64.50%

CMG

4.44%

5.40%

-15.77%

229.30%

 

At $62.08, Yum! Brands is currently trading below all its averages.

50-Day SMA

67.27

100-Day SMA

68.26

200-Day SMA

67.62

 

E = Earnings and Revenue Have Been Impressive          

Earnings and revenue have showed consistent improvements on an annual basis since 2009.

2008

2009

2010

2011

2012

Revenue ($)in billions

11.30

10.84

11.34

12.63

13.63

Diluted EPS ($)

1.96

2.22

2.38

2.74

3.38

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue, but a decline in EPS.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in Billions

4.11

2.74

3.17

3.57

4.15

Diluted EPS ($)

0.75

0.96

0.69

1.00

0.72

 

T = Trends Do Not Support the Industry

It’s easy to focus on specific stories of the companies listed in this article, but if you stop and look at the big picture – the group as a whole – they haven’t been performing as well as expected for over a year now.

Conclusion

Yum! Brands stated that there might be a significant decline in EPS in H1 2013. Translation: there will be a significant decline in EPS in H1 2013. However, the company also stated that it expects EPS growth in H2 2013. If you’re an investor, then this is similar to taking an open-book test. While may be large fluctuations in the stock price between now and mid-summer, perhaps positive, a wise investor would just sit back and observe for now. If you miss an opportunity, so be it. There will always be other opportunities. The goal is capital preservation. If Yum! Brands takes a hit between now and the summer — which seems pretty likely at this point — then this might lead to a more appealing investing opportunity in the summer.

At the moment, Yum! Brands is a WAIT AND SEE.

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