Yum Brands, Inc. (YUM) stock is at a bit of a crossroads heading into next week’s third-quarter earnings report.
Yum Brands has outperformed the S&P 500 year-to-date, gaining more than 8% since the start of 2015, but the stock has still fallen nearly 14% since reporting second-quarter earnings in July. As a result, YUM stock’s 50-day and 200-day moving averages are on the verge of a “death cross,” which could lead technical traders to abandon shares.
Yum Brands has a chance to change this outcome with next week’s third-quarter report, which is slated to hit the Street after the close of trading on Tuesday. Currently, Wall Street is expecting YUM earnings to rise nearly 23% to $1.07 per share in the third quarter, with revenue expected to advance 9.9% to $3.69 billion.
Historically, Yum Brands has bested the consensus view three times in the past four quarters, instilling a modicum of bullish sentiment among analysts heading into next week’s report. Specifically, EarningsWhisper.com reports that Yum Brand’s third-quarter whisper number comes in at $1.10 per share — three cents better than the Street’s estimates.
Optimism ends there for YUM stock, however. In fact, data from Thomson/First Call reveals a wealth of skepticism, with 15 of the 24 analysts following YUM stock rating it a “hold” or worse. Meanwhile, the 12-month consensus price target of $92.50 represents a 17.3% premium to Thursday’s close, providing additional ambiguity on Yum brands’ outlook.
Sentiment is different in the options pits, though. Short-term traders have grown more hopeful on YUM stock’s earnings potential. For instance, the October put/call open interest ratio has been on the decline recently, coming to a perch of 0.69 as of this morning.
Additionally, the weekly October 9 series put/call ratio has dipped to 0.57, with calls nearly doubling puts among short-term options traders.
Click to Enlarge Overall, weekly October 9 series implieds are pricing in a potential post-earnings move of about 7% for YUM stock. This places the upper bound at $85.57, while the lower bound lies at $74.43.
A rally would go a long way toward potentially preventing a “death cross” for YUM, vaulting the shares north of all their short-term moving averages. A negative reaction to earnings, however, would be a bearish signal for YUM stock.
2 Trades for YUM Stock
Call Spread: YUM stock has rebounded sharply in the past couple of sessions, with the shares bouncing off support near $75. Strong earnings could provide additional fuel for this rally, proving option bulls correct. Traders looking to side with rising call activity in the options pits might want to consider an October $80/$85 bull call spread.
At last check, this spread was offered at $1.54, or $154 per pair of contracts. Breakeven lies at $81.54, while a maximum profit of $3.46, or $346 per pair of contracts, is possible if YUM closes at or above $85 when October options expire.
Put Spread: Alternately, YUM stock is certainly at risk of extending its recent downtrend, and a “death cross” could certainly provide additional fuel for those losses. As such, those wanting to side with the bears in the brokerage bunch might consider an October $75/$80 bear put spread.
At last check, this spread was offered at $1.86, or $186 per pair of contracts. Breakeven lies at $78.14, while a maximum profit of $3.14, or $314 per pair of contracts, is possible if YUM closes at or below $75 when October options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
