Yum! Brands — How to Play Tuesday’s Earnings Report

by Jamie Dlugosch | October 3, 2011 1:47 pm

Global fast-food company Yum! Brands (NYSE:YUM[1]) reports earnings for the quarter ending Sept. 30 on Tuesday after the market closes. While most of the concerns in the market relate to the U.S. economy, Yum! Brand’s report will provide a glimpse of economic activity across the globe.

Growth in foreign markets has been huge for the fast-food industry. Look no further than the tremendous success of names like McDonald’s (NYSE:MCD[2]) and Starbucks (NASDAQ:SBUX[3]), both of whom have greatly been expanding overseas. For Yum! Brands, sales overseas have grown from 39% of total revenue in 2007 to 65% at the end of 2010.

That growth in sales helped boost YUM shares by more than 100% during the past five years. The risk to Yum! Brands is a reduction in growth if a global recession hits.

During the past four quarters, Yum! Brands’ quarterly profits have been steady:

Yum! Brands NYSE:YUM

Yum! Brands basically has matched analyst estimates during the past year, but in the last quarter ending June 30, the company beat estimates by five cents per share. Despite that performance, Wall Street estimates for the quarter ending Sept. 30 have dropped by a penny per share during the past 90 days. The average estimate for the period is for the company to make 83 cents per share.

For the current year, Wall Street expects Yum! Brands to make $2.85 per share. In 2012, the average profit estimate is $3.21 per share, or 13% higher than 2011. At current prices, YUM trades for 17 times current-year estimates of earnings.

YUM shares have moved fractionally higher in 2011. Investors are taking a wait-and-see approach with the company. To date, operating performance has met expectations, but there appears to be few catalysts for the stock going forward.

Yum! Brands NYSE:YUM
Click to Enlarge
During the past 12 months, Yum! Brands has gained a paltry 6%.

After an impressive run during the past five years, growth at YUM is slowing. So far investor reaction has been cautious, but not disastrous. Operating performance against Wall Street expectations has been OK. Concerns about slower growth in China and the possibility of recession elsewhere around the globe are legitimate.

However, the biggest concern for traders heading into Yum! Brands’ earnings report on Tuesday would be valuation. Many companies still trade for a premium to expected growth, with YUM being one of them. To keep a high valuation, the company needs impressive earnings without reduced guidance for the future.

I do not see a stellar report in Yum! Brands’ future. Instead, look for the company to match Wall Street expectations or beat by the proverbial penny per share. Included in the report will be guidance that is likely to disappoint. I expect shares to slip by 3% to 5% as a result.

Other companies reporting results this week include Costco (NASDAQ:COST[4]), Marriott International (NYSE:MAR[5]), Monsanto (NYSE:MON[6]), Ruby Tuesday (NYSE:RT[7]), Helen of Troy (NASDAQ:HELE[8]) and Constellation Brands (NYSE:STZ[9]).

  1. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  2. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  3. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  4. COST: http://studio-5.financialcontent.com/investplace/quote?Symbol=COST
  5. MAR: http://studio-5.financialcontent.com/investplace/quote?Symbol=MAR
  6. MON: http://studio-5.financialcontent.com/investplace/quote?Symbol=MON
  7. RT: http://studio-5.financialcontent.com/investplace/quote?Symbol=RT
  8. HELE: http://studio-5.financialcontent.com/investplace/quote?Symbol=HELE
  9. STZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=STZ

Source URL: https://investorplace.com/2011/10/yum-brands-earnings-report/
Short URL: http://invstplc.com/1nxOjfQ