Can Yum Brands See a Comeback?

With shares of Yum Brands (NYSE:YUM) trading around $75, 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.

Yum Brands provided full-year estimates which left much to be desired. However, a comeback next year could see the company hit its stride. The owner of KFC, Pizza Hut, and Taco Bell said it expects full-year 2013 earnings to see a high single- to low double-digit decline from a year earlier. In 2014, though, the company expects earnings-per-share growth of 20 percent. ”We expect to have a strong bounceback in 2014 following a year that is clearly below our high expectations. In China, we have an aggressive plan to reignite sales at KFC and we expect continued strong performance at Pizza Hut Casual Dining,” said CEO David C. Novak.

T = Technicals on the Stock Chart Are Strong

Yum Brands stock has been exploding higher in recent years. The stock is currently pulling back from highs and may need to consolidate before heading higher. 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 above its rising key averages, which signals 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

25.59%

76%

74%

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

Put IV Skew

Call IV Skew

December Options

Flat

Average

January Options

Flat

Average

As of Tuesday, 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 very 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 Decreasing 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-67%

-11.59%

-25%

-3.09%

Revenue Growth (Y-O-Y)

-2.89%

-8.33%

-7.58%

1.02%

Earnings Reaction

-7.24%

-1.14%

7.01%

-2.9%

Yum Brands has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic about Yum Brands’s recent earnings announcements.

P = Average 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

14.2%

9.19%

81.91%

60.66%

29.01%

Yum Brands has been an average relative performer, year-to-date.

Conclusion

Yum Brands owns and operates KFC, Pizza Hut, and Taco Bell restaurants around the world. The company provided full-year estimates that left much to be desired. The stock has been surging higher and is currently pulling back from highs for the year. Over the last four quarters, earnings and revenues have been on a decline. However, investors have been generally pleased about the company’s recent earnings announcement. Relative to its peers and sector, Yum Brands has been an average year-to-date performer. WAIT AND SEE what Yum Brands does in coming quarters.

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