Option Trade
Yum! Brands, Inc. (NYSE:YUM) Calls 
Monday, October 05, 2015

**OPTION TRADE: Buy the YUM Jan 2016 85.000 call (YUM160115C00085000) at approximately $3.70. Place a pre-determined sell at $7.50.

Note: No protective stop losses added as yet -- but if you wish to do so make it $1.50.

by Ian Harvey

October 05, 2015


Yum! Brands, Inc. (NYSE: YUM), engaged in the restaurant business, will report its third-quarter results after the market close on October 6. Analysts are expecting the fast food chain operator to post a year over year rise in both earnings per share and revenue for the most recent quarter.

Yum! Brands has been forecast to report earnings of $1.07 per share on revenue of $3.67 billion for the third quarter.

Last year Yum! Brands said it earned 87 cents per share on revenue of $3.35 billion for the 2014 third quarter.

Yum! Brands Is a Louisville, KY-based quick service restaurant developer, operator, franchiser and licenser. The company's restaurants include KFC, Taco Bell and Pizza Hut. The company also has two lesser-known brands, Little Sheep and East Dawning, in China. Yum! Brands operates more than 41,000 restaurants in over 125 countries.

According to IBISWorld, in 2014, Yum! Brands had the second-largest market share of 11% in the US fast food industry. It followed McDonald’s, which had the largest share at 17%.

The company shares have rallied 13.92% in the past 52 Weeks. Shares of Yum! Brands, Inc. rose by 3.82% in the past week and 3.44% for the last 4 weeks. In the past week, the shares have outperformed the S&P 500 by 2.75% and the outperformance increases to 1.84% for the last 4 weeks.

Technical Details

Shares of Yum! Brands opened at $81.60 today. The stock’s 50 day moving average price is $80.62 and its 200-day moving average price is $85.45.

The firm has a market capitalization of $35.19 billion and a P/E ratio of 39.98.

Yum! Brands has a 12-month low of $65.81 and a 12-month high of $95.90.


Previous Earnings

Yum! Brands last issued its quarterly earnings data on Tuesday, July 14th. The restaurant operator reported $0.69 EPS for the quarter, beating the consensus estimate of $0.63 by $0.06. The firm had revenue of $3.11 billion for the quarter.

During the same period in the prior year, the company posted $0.73 earnings per share. The company’s quarterly revenue was down 3.1% compared to the same quarter last year. Equities analysts anticipate that Yum! Brands will post $3.52 EPS for the current fiscal year.

The company has posted an average positive earnings surprise of 3.91% in the trailing four quarters.

Future Earnings

• Same-store sales growth for the Taco Bell, KFC, and Pizza Hut divisions have been trending upward.

• More importantly, same-store sales growth in Yum’s China division, which contributes to over half of Yum’s revenue, has also shown improvements and is heading towards the positive territory.

• Shares have increased as a result of rising optimism for the future of the company’s same-store sales growth.

• Overall, analysts have revised their estimates downward for Yum’s upcoming earnings. • Revenue was revised downward to $3.7 billion, which would translate to a year-over-year growth rate of 9.7%.

• EBITDA (earnings before interest, tax, depreciation, and amortization) is expected to come in at $558 million, which would result in 15% EBITDA margins.

• Net income is expected to come in at $473 million, which was revised downward by 0.13%. Year-over-year revenue is expected to grow by 17.3%.

• As a result of lowered top line and bottom line estimates, EPS (earnings per share) for the upcoming quarter is anticipated to come in at $1.06, which was revised downward by 0.13%.

• This would still mean a 22.7% growth in EPS compared to the corresponding quarter in 2014.

Why YUM?

• Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market, Yum Brands Inc's return on equity significantly exceeds that of both the industry average and the S&P 500.

• Regardless of the drop in revenue, the company managed to outperform against the industry average of 3.8%. Since the same quarter one year prior, revenues slightly dropped by 3.1%.

• Yum Brands Inc's earnings per share declined by 27.4% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years. However, it is anticipated that this trend will reverse over the coming year. During the past fiscal year, Yum Brands Inc reported lower earnings of $2.29 versus $2.36 in the prior year. This year, the market expects an improvement in earnings ($3.52 versus $2.29).

• Looking at where the stock is today compared to one year ago, it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry, but, that other strengths this company displays justify these higher price levels.

• Regardless of YUM's low profit margin; it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 7.56% trails the industry average.

Analysts Opinions

Analysts at Nomura began coverage on shares of Yum! Brands in a research note issued to investors last Thursday. The firm set a “buy” rating on the restaurant operator’s stock.

Also, TheStreet Ratings team rates Yum Brands Inc as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:-

“We rate Yum Brands Inc (YUM) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its notable return on equity and solid stock price performance. We feel its strengths outweigh the fact that the company has had subpar growth in net income.”

The company has also been the subject of a number of other research reports:-

• Deutsche Bank reissued a “hold” rating and issued a $90.00 price target on shares of Yum! Brands in a research note on Tuesday, August 11th.

• Oppenheimer restated an “outperform” rating and issued a $105.00 price objective on shares of Yum! Brands in a report on Wednesday, August 19th.

• Zacks lowered shares of Yum! Brands from a “buy” rating to a “hold” rating in a report on Monday, August 17th.

• RBC Capital restated a “top pick” rating and issued a $103.00 price objective (up from $93.00) on shares of Yum! Brands in a report on Monday, June 8th.

• Finally, Morgan Stanley reaffirmed a “hold” rating and issued a $82.00 target price on shares of Yum! Brands in a research report on Thursday, August 13th.

Two research analysts have rated the stock with a sell rating, eleven have given a hold rating, eleven have issued a buy rating and one has assigned a strong buy rating to the company. Yum! Brands has a consensus rating of “Hold” and a consensus target price of $91.34.

Harvey’s Options Volatility Indicator


Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the YUM Jan 2016 85.000 call (YUM160115C00085000) at approximately $3.70. Place a pre-determined sell at $7.50.

Note: No protective stop losses added as yet -- but if you wish to do so make it $1.50.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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