Yum Brands (NYSE:YUM) is expected to release first-quarter earnings on April 29. Year-to-date, YUM stock is down about 14% and the price is now hovering around $85.
Are the final days of April may be an opportune time to buy into the company? If you are not yet a shareholder, you may want to wait until the earnings release. In the coming days, the stock is likely to be volatile with a downward bias.
Long-term investors with a two- to three-year time horizon may consider buying into YUM if the price declines below $80, especially toward $70. Here’s why.
YUM Stock and the Pandemic
The Kentucky-based group has 50,000 restaurants in more than 150 countries. Most of them are operated by independent franchisees.
Their three main brands, i.e., KFC, Pizza Hut and Taco Bell, are recognizable by billions of consumers worldwide. The company defines them as “global leaders of the chicken, pizza and Mexican-style food categories.” It also owns The Habit Burger Grill, a fast-casual restaurant chain.
Management regards the fast-food business as a premier player in global retail development as “the Yum Brands system opens over nine new restaurants per day on average.”
About 41% of sales come from the U.S., followed by 30% from Asia. Needless to say, the company has been affected by the global novel coronavirus pandemic that started in China. In recent weeks, local authorities in different countries have imposed various lockdown measures. As a result the group has been either scaling back or closing down restaurant operations.
InvestorPlace contributor Faisal Humayun has recently written in depth about the potential adverse effects of these developments on YUM. There are several important question marks that the group faces.
On March 25, management suspended its $2 billion buyback program and provided a royalty grace period for the franchisees. In 2019, the company repurchased 7.8 million shares totaling $810 million at an average price per share of $104. Seasoned investors realize that without the share buybacks, it may be more difficult to keep Yum’s share price up in volatile times.
In other words, the restaurant chain is working to navigate the current prolonged economic downturn. Therefore, its upcoming earnings report will especially be important.
What to Expect From Q1 Earnings
Recent research led by Scott Baker of University of Chicago highlights that “as the virus spread and more households stayed home, we see sharp drops in restaurants, retail, air travel and public transport in mid- to late March. Restaurant spending declined by approximately one-third.”
Revenues, profits, as well as cash flows of many restaurants are being adversely affected by the current pandemic. And Yum Brands cannot potentially be immune from the economic shutdown.
When the group last reported results for the fourth quarter the full year of 2019, investors were not impressed. Quarterly revenue came at $1.69 billion, a year-over-year increase of 8.3%.
Worldwide system sales excluding foreign currency translation grew 10%, with Taco Bell at 13%, KFC at 11% and Pizza Hut at 7%.
Many analysts debate the effects of the high levels of debt the restaurant chain carries. It remains a highly leveraged business.
In an effort to bolster its cash position, Yum brands has also recently raised $600 million in a junk bond issue. As reported by CNBC, the company’s cost of borrowing has increased considerably.
The Street will analyze each brand in the Q1 results to see how soon it will be possible to look beyond the pandemic. As a result, I expect volatility around the earnings release date.
High levels of debt and the economic contraction we are facing make it difficult to justify high valuation levels. Its forward price-earnings and price-sales ratios stand at 24.8 and 4.8, respectively. Value-seeking investors may not necessarily find these numbers attractive.
Initially as the Covid-19 outbreak reached our shores, investors sold off most shares, including YUM, aggressively. On March 23, Yum hit a 52-week low of $54.95.
However, since then, YUM’s stock price has gone up by more than 55%.
The Bottom Line on YUM Stock
Could it be that any potential quarterly good news from Yum Brands is already priced into the shares? If you also think so, then I’d encourage you to first study the upcoming first-quarter results before buying into the share price.
Are you a shareholder who has also participated in the recent increase in price? Then, you may want to ring the cash register and realize some of the gains. While long-term investors would like to see the price go and stay over $90, short-term traders will likely keep it between $85 and $70.
Alternatively, if you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon. Such a covered call position would offer you some downside protection. It would also enable you to participate in a potential up move.
Finally, those investors who would like some Yum exposure but are nervous about the prospects for the year may consider buying into an exchange-traded fund that has YUM stock as a holding.
Examples such ETFs would include the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (NYSEARCA:RCD), the Consumer Discretionary Sector SPDR (NYSEARCA:XLY) or the Invesco Zacks Mid-Cap ETF (NYSEARCA:CZA).
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
