Is Yum! Brands Well-Positioned for the Future?

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.

The question of grabbing a meal from Yum! Brands, owned KFC or McDonald’s (NYSE:MCD) has become a distant thought for the food lovers in China post the fresh uncovering of a food safety scandal there. However, Brian Nelson, the President of Equity Research at Valuentum, told CNBC that the impact will settle in a short term rather than stretching out for a longer period. “When we look at McDonald’s and Yum! Brands, brand awareness in China, they are among the most recognized foreign brands. And we would expect consumers to come back to those brands,” said Brain Nelson. He went on to state that over the long-term, the firm is positive about the sales of the two companies while they see the scandal impact for a short-term. He based his views on Yum! Brands, second-quarter reports, in which, the revenues have recovered significantly in its China division that accounts for nearly 40 percent of its total operating profit, following the outbreak of Avian influenza and other poultry related sourcing issues. Also, the operating profit of Yum! Brands, in China has tripled during the second quarter.

Further, Nelson explained that Yum! Brands, same-store performance was in a poor state through April to June in 2013, but the company swinged back with better results in the second-quarter. On the other hand, Nelson believes that McDonald’s will have little impact of the food scandal as the brand is fairly diversified in the region, compared to Yum Brands. On a personal note, Nelson is fairly confident about both Yum! Brands, and McDonald’s as the two globally recognized brand’s management chains are concerned and act with utmost responsibility, when it comes to keeping the consumer safety at par.

T = Technicals on the Stock Chart Are Mixed

Yum! Brands stock has struggled to make significant progress in recent times. However, the stock is currently surging higher and looks poised to continue. 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 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

17.10%

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 today, 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%

Yum! Brands has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Yum! Brands’ 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), Jack In The Box (NASDAQ:JACK), and sector?

Yum! Brands

McDonald’s

Wendy’s

Jack In The Box

Sector

Year-to-Date Return

-1.02%

-0.78%

-4.82%

14.52%

2.97%

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

Conclusion

Yum! Brands owns and operates KFC, Pizza Hut, and Taco Bell restaurants around the world. The stock has struggled to make significant progress in recent times, but is currently surging higher. Over the last four quarters, earnings and revenues have been on the rise, which has left investors pleased with recent earnings announcements. Relative to its peers and sector, Yum! Brands has been an average year-to-date performer. WAIT AND SEE what Yum! Brands does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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