North America

Earnings Preview: Yum! Brands Q4 2016 (YUM)

By: Craig Bowles

Overview

Yum! Brands, Inc. (YUM) is slated to report 4Q 2016 earnings before the open of trading on Thursday, February 9th. Results are expected to be released at approximately 7:00 a.m. ET followed by a conference call the following morning at 9:15 a.m. available through Yum Brands Investor Relations.  Yum! Brands operates quick service restaurants in the United States and internationally and is a component of the S&P 500. It operates in five segments: YUM Restaurants International, Taco Bell U.S., KFC U.S., Pizza Hut U.S., and YUM Restaurants India. The YUM China division was spun-off on November 1 and became Yum! China (YUMC).

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Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS) Excluding Items: The Street estimate is $0.73 (range $0.67 to $0.83) (Source: Yahoo! Finance). Consensus was $0.91 three months ago.
  • Revenues: Analysts expect a decrease of 48.4% y/y without their China ops to $2.04 bln (range $1.92 bln to $2.16 bln).
  • Adjusted Earnings Per Share (EPS) Guidance for FY2017: The current Street estimate is $2.75 (range $2.52 to $2.98).
  • Yum Brands has a P/E of 16.8 vs a 5-year average of 26.9; Price/Sales of 2.1 vs a 5-year average of 2.6; Price/Cash Flow of 14.7 vs a 5-year average of 16.3. Dividend Yield at 2.6% vs a 5-year average of 2.2%.
  • Analysts view Yum! with 11 Buy, 11 Hold, and 1 (3 last qtr) Sell ratings, according to MarketBeat.com.
  • Insiders bought 1,698 shares over the last three months but have sold a net 619,528 shares in the past year. (source: NASDAQ.com) Yum! Brands stock buybacks are normally announced in Q4 but plans to repurchase an additional $4.2 bln in shares was announced in May 2016 after $2 bln had been repurchased in the previous six months.
  • Yum! Brands results could impact other quick service restaurant companies, such as Papa John’s (PZZA), McDonald’s (MCD), and Wendy’s (WEN).
  • Yum! Brands shares have a 1-day average price change on earnings of 4.22%. Options are pricing in an implied move of 3.83% off earnings.

Recent News

  • 01/26: Bernstein reiterated an Outperform rating on Yum Brands while noting several drivers for the stock, including refranchising, which should boost EBIT margins by as much as 20 percentage points, and EBIT dollars by 15% or more, through fiscal 2019, according to a post on Barron’s.com.
  • 01/04: Nomura maintained a Buy rating on Yum! Brands citing that their reduced estimates were based solely on currency headwinds, according to a post on Benzinga.com.
  • 10/19: Credit Suisse upgraded Yum Brands to Outperform saying that the U.S. business could have significant upside after having separated the China business. New Yum will return $7 billion in cash to shareholders over 2017-19E (~80% via buybacks), or ~30% of market capitalization, according to a post on Barron’s.com.

Technical Review

Yum! Brands’ shares are testing the May 2015 all-time high of $66.32 and we’re still early in the seasonally strong first half of the year. Point and figure technicians have a bullish price objective of $78. (Chart courtesy of StockCharts.com)

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Summary

2016 was a transformational year for Yum Brands with Yum China becoming independent. Yum is expected to return $7 billion to shareholders over the next few years. Insider selling halted after ramping up the previous two quarters. The company beat/missed analyst consensus by an average of 1c over three of the past five quarters. Of the other two quarters, one missed by 7c and one beat by 12c. Estimize consensus for EPS excluding items of $0.76 on revenue of $2.081 bln compares to analyst consensus of $0.73 on revenue of $2.04 bln.

 

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