Yum! Brands, Inc. (NYSE: YUM) traded lower this morning, but a stable stock market is keeping the stock at least somewhat elevated after a mixed earnings report. The lackluster guidance and individual performance metrics may act as an overhang despite the notion that YUM probably has the safest dividend in the fast food and casual dining sector.
The owner of KFC, Taco Bell and Pizza Hut posted earnings per share of 58 cents on $2.57 billion in revenues, which beat Thomson Reuters’ consensus targets of 54 cents and $2.54 billion. The company also reported worldwide system sales were up 4% outside of currency translations. This all sounded fine until guidance came out along with its regional data.
The 12% earnings growth comes to $2.43 EPS versus its earlier $2.39 forecast, but Thomson Reuters had forecasted $2.48 EPS for the year. The company’s China system sales rose 15%, but the 4% gain in China’s same-store sales was under a loose expectation of 5%. China is supposed to be the great catalyst of the story, yet it is not as robust as hoped. Same-store sales in the United States were flat, with a large drop at KFC.
This points to a slower growth story, and a $40.50 share price doesn’t appear to leave much upside from current prices. That gives a P/E of 16.6 for 2010 based on the company data, or a forward P/E for 2010 of 16.3 for the pre-earnings consensus data. For comparison, McDonald’s Corporation (NYSE: MCD) is trading about 15.75 times 2010 expected earnings.
The company is trying to refranchise a substantial portion of its U.S. business operations. That may work, but getting credit for such operations would have been far easier in better economic times, which poses an added risk. And franchise operations as a whole are often not run as well as company-owned stores.
Right now it is the strength of the market that is holding YUM shares above the $40 mark. Making a short bet against the stock at $40.50 might seem to have an equal risk-reward if you take into consideration that the stock’s 52-week range is $32.49 to $44.
Shares went as high as $41.82 before earnings. The chances that yesterday’s earnings news would take the stock above that figure only seems possible if the market gets another seven straight days of rallying. If it turns out that stocks rallied too far too fast (800 Dow points from trough to peak in the past eight sessions), then YUM could easily see its share price drop. The low before the last recovery was $38.25, and in a static market scenario, it seems that YUM could go back toward $39.
The YUM Aug 39 Puts, currently at 80 cents, will likely be cheaper after Friday’s expiration for July contracts, so put this trade on your radar for next week.
A short sale probably just needs a stop loss rather than a hedged trade with a call option because the earnings news is already out.
After 800 points up in eight sessions, there just does not seem to be enough news out there to keep driving YUM higher in this market.
Follow Jon Ogg on Twitter @jonogg.
