Should You Take a Chance With Yum! Brands?

July 17, 2014

With shares of Yum! Brands (NYSE:YUM) trading around $77, 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 in 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.

On Wednesday afternoon, Yum! Brands reported its second-quarter earnings. The stock, which hit an all-time high on Tuesday, pulled back on the news. This shouldn’t surprise investors, as the stock had been priced for perfection. The company reported earnings per share of 73 cents on $3.2 billion of revenues. These figures represent 20 percent and 10 percent growth rates, respectively. The vast majority of the company’s growth came from its Chinese division, which grew sales at 21 percent, and most of this growth came from the company’s KFC restaurants.

T = Technicals on the Stock Chart Are Mixed

Yum! Brands stock has been moving higher over the last couple of months. However, the stock is currently pulling back and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? 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 between its rising key averages, which signals neutral price action in the near-term.

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	19.28%	0%	0%

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

	Put IV Skew	Call IV Skew
August Options	Average	Average
September Options	Average	Average

As of Thursday, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral 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 Increasing 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 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?

	2014 Q2	2014 Q1	2013 Q4	2013 Q3
Earnings Growth (Y-O-Y)	19.67%	20.83%	-3.62%	-67%
Revenue Growth (Y-O-Y)	10.33%	7.46%	0.63%	-2.89%
Earnings Reaction	-6.89%*	-0.86%	8.91%	-7.24%

*As of this writing.

Yum! Brands has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Yum! Brands recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

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

	Yum! Brands	McDonald’s	Wendy’s	Jack In The Box	Sector
Year-to-Date Return	9.39%	2.31%	-5.28%	12.83%	5.81%

Yum! Brands has been a relative performance leader, year-to-date.

Conclusion

Yum! Brands owns and operates KFC, Pizza Hut, and Taco Bell restaurants around the world. On Wednesday afternoon, the company reported its second-quarter earnings. The stock has been moving higher over the last couple of months but is currently pulling back. Over the last four quarters, earnings and revenues have been on the rise. However, investors have had mixed feelings about recent earnings announcements. Relative to its peers and sector, Yum! Brands has been a year-to-date performance leader. Look for Yum! Brands to OUTPERFORM.