Is Yum! Brands a Buy After Recent Earnings?

With shares of Yum! Brands (NYSE:YUM) trading around $65, 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.

Yum Brands shares fell during premarket trading after the owner of fast food joints including KFC and Pizza Hut posted earnings Tuesday that revealed the company is still struggling in China due to an avian flu scare and the slumping Chinese economy. Analysts had expected declines in Yum’s China business, but the company still missed estimates. Yum posted earnings per share of 85 cents, falling below analyst expectations of 93 cents. Same-store sales in China fell 11 percent. “Even with our recent challenges, KFC is unquestionably the category leader in China and we remain confident sales will fully recover from the adverse publicity surrounding the December poultry supply incident,” Yum CEO David Novak said in the company’s earnings report.

T = Technicals on the Stock Chart Are Mixed

Yum Brands stock has been exploding higher in recent years. The stock is now trading sideways as it attempts to digest gains from a recent run. 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 key averages, which signal neutral 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

26.05%

63%

61%

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

Put IV Skew

Call IV Skew

October Options

Steep

Average

November Options

Steep

Average

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

-67.00%

-11.59%

-25.00%

-3.09%

Revenue Growth (Y-O-Y)

-2.89%

-8.33%

-7.58%

1.02%

Earnings Reaction

-6.94%*

-1.14%

7.01%

-2.90%

Yum Brands has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have not been too happy about Yum Brands’s recent earnings announcements.

* As of this writing

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 sector?

Yum Brands

McDonald’s

Wendy’s

Jack In The Box

Sector

Year-to-Date Return

-1.70%

5.88%

76.17%

34.45%

15.38%

Yum Brands has been a poor relative performer, year-to-date.

Conclusion

Yum Brands owns and operates KFC, Pizza Hut, and Taco Bell restaurants around the world. The company looks to continue its struggles as earnings were released that disappointed the markets. The stock has been surging higher but is now trading in a consolidation range extending back several quarters. Over the last four quarters, earnings and revenues have been on a decline which have led to unhappy investors. Relative to its peers and sector, Yum Brands has been a weak year-to-date performer. WAIT AND SEE what Yum Brands does in coming quarters.

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.

More from The Cheat Sheet