YUM Stock: Buy Yum! Brands After Delightful Earnings Dish

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If you’ve been on the sidelines waiting for shares of Yum! Brands, Inc. (NYSE:YUM) to get cheaper — good luck with that.

Double Down DogInvestors and traders are gobbling up YUM stock after the Taco Bell and Pizza Hut operator posted better-than-expected first-quarter earnings results Tuesday.

YUM shares were heading more than 3% higher in Wednesday’s premarket trading, near a high of $84 per share. That would signal an all-time high for the YUM stock price, surpassing the prior mark of $83.58 reached in July 2014.

And still, there are more reasons to be bullish about Yum! Brands than there are reason to avoid the shares, even at such lofty levels.

Essentially, both Yum! Brands and YUM stock might as well be made out of kevlar. That is to say, the KFC restauranteur has time and again taken the bears’ best shot and survived.

Don’t bother counting the number of times. Instead, spend your time more fruitfully by looking at where the stock is heading next.

Hint: It’s not down.

Yum! Brands: The Quarter That Was

Consider that, for the quarter that ended March 21, Yum! Brands reported a profit of $362 million, or 81 cents per share. While that marked a 9% year-over year decline from last year’s profit of $399 million, that still beat consensus estimates by 6 cents.

And on an adjusted basis, when removing one-time gains and costs, Yum! Brands earnings came to 80 cents per share — enough for an 8-cent beat, according to analysts polled by Thomson Reuters.

First-quarter revenue, meanwhile, fell 4% year-over-year to $2.62 billion, slightly missing estimates of $2.65 billion. It would seem, though, by the reaction of YUM stock that investors and traders focused instead on how bad things could have been.

And that’s the smart play, especially with sales declining sharply in China, where Yum! Brands gets more than half of its revenue and profits.

China comparable same-store sales (comps), which is another way to describe revenue coming from stores in China open at least one year, plummeted 12% from the year-ago quarter. That’s not much of a surprise, though. Yum! Brands continues to repair the damage done to its reputation from last year’s food-supply scare. Here, too, that YUM stock is up despite the huge drop in China comps suggests investors are looking on the bright side.

While the 12% decline in comps is — indeed — a huge number, especially from the company’s largest market, it still translate to a 4-percentage-point improvement from the fourth quarter, when the drop was more severe at 16%.

Revenue from stores open at least one year is considered an important indicator of operational performance. This is because it strips away the impact of recently opened and closed restaurants.

Segment-wise, global revenue from KFC increased 8% year-over-year, driven by the addition of new sites, and global KFC comps grew 5%. Taco Bell revenue climbed 9% above last year, thanks to new sites and a 6% year-over-year jump in comps. Pizza Hut, on the other hand, was only lukewarm as global revenue advanced just 2%, while comps came in flat.

In this case, while it’s still too early to suggest Yum! Brands is now in the clear from past transgressions, investors — as seen in YUM stock — are encouraged by the improvements the company continues to make.

Bottom Line

In short, YUM stock may just be getting warn, given the rate at which Yum! Brands continues to improve its business. At around $84 per share, investors should buy YUM stock now and expect it to hit $92 by the end of the year, netting gains of around 7%.

And as Yum! Brands continue to drive more traffic to its restaurants with more product innovations such as premium coffee at KFC and its breakfast line at Taco Bell, the company should benefit from higher sales. Plus, with potential gains in areas like Russia and Africa, YUM stock is a sure bet.

I’m targeting $100 in the next 12 to 18 months, which would mean 20% gains. Add in a modest yield of 2%, and Yum! Brands offers excellent value.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/yum-stock-yum-brands-serves-delightful-earnings-dish/.

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