Yum Brands (YUM), the mega food chain that owns Pizza Hut, Taco Bell and KFC, is set to report earnings.
But while Wall Street’s consensus is rather upbeat, there’s a big cloud that looms over earnings — China.
Yum Stock and China
Yum stock’s exposure to China used to be a tailwind, and one with promise, given the rise of the modern Chinese consumer.
Now, that tailwind could quickly turn into a tailspin as China’s future seems far less bright.
If we extract the latest figures from Yum Brands earnings figures, we can estimate that roughly 53% of YUM stock’s revenues come from its China brand.
Same-store sales, which measure revenue growth from existing branches, were already weak in the last quarter. According to Yum’s own report, growth fell roughly 10% year over year.
But now, with most estimates and many of the data points collected, Q3 for China was bleaker than Q2. It’s hard to see how Yum’s China brand can present strong growth figures in that segment. And if that segment has been this disappointing thus far, why would it improve as conditions deteriorate?
Don’t Get Your Hopes Up
According to the Financial Times’ average estimates survey, analysts expect $1.07 earnings per share and revenue of $3.67 billion. That would embody a 23% growth in earnings compared to a year earlier and a 10% growth in revenue.
Meanwhile, the lower estimates look for EPS of 97 cents for Yum stock in Q3. There’s a high likelihood that China would put significant pressure on earnings, so the prudent approach would be to expect earnings to come closer to the lower estimate.
Of course, nothing is written in stone. Yum stock earnings could beat or meet the Street’s expectations.
But let’s face it, being upbeat on anything related to China’s consumer sector is a gamble.
Yum Stock Valuation Still Pricey
True, if Yum stock does beat the consensus, the stock might edge higher. But Yum stock still trades at a high price-to-earnings ratio of 40. And earnings growth hasn’t exactly been jaw-dropping enough to support such a high multiple.
In the long run, Yum stock is still risky compared to its main rival, McDonalds (MCD), so if you decide to jump on the stock after a beat, be aware of the risk you’ll be taking.
Bottom Line
Yum stock, on the surface, presents a terrific growth story — one of a food chain with a huge emerging market presence — and investors rewarded it with their love.
But beware; Yum stock has no superior fundamentals as compared to its cheaper peers.
If Yum Brands earnings continue to be mediocre, investors’ patience for paying high premiums for them might just run out.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
