Yum! Brands Earnings Preview: A Delicious Treat or Indigestion?

will report its first quarter results on Tuesday after market close. Analysts are expecting the fast food chain operator to earn $0.85 per share on revenue of $2.80 billion. The last time Yum! Brands reported its earnings was on February 3 when the company earned $0.70 per share, falling short of the consensus estimate of $0.80. Revenue also fell short of the consensus estimate by $90 million at $4.17 billion. On February 3, Yum! Brands' management stated that it is confident it has the “people and resources” to deliver at least 20 percent EPS growth in 2014. In order to deliver earnings per share growth in 2014, Yum! Brands will need to see its sales growth in China pick up momentum and deliver domestic growth through new initiatives. Yum! Brands announced that it will enter the breakfast market by selling waffle tacos, egg burritos and a bacon wrap beginning March 27. On March 6, analysts at Baird upgraded shares to Outperform from Neutral while noting that sales in China will pick up throughout the year. Additionally, other emerging markets will contribute ten percent earnings growth. Yum! Brands launched new marketing campaigns involving notable celebrities and revamped its restaurant design and menu in China. When Yum! Brands reports its first quarter results, investors will pay close attention to any hints management offers over its Chinese sales and updates on its 20 percent earnings per share growth target.

John Ivankoe of

believes that Yum! Brand shares are fairly valued ahead of the company's new reporting structure. Yum! Brands lineup of restaurants which include KFC, Taco Bell and Pizza Hut will now be reported globally (excluding China and India) as opposed to the previous reporting system which consolidated the three brand results in the U.S. and its international division, Yum! Brands International (YRI). “Potentially, we see the combined US/YRI business (now re-segmented by brand) operating under one debt-heavy capital structure while China/India would trade without balance sheet debt, to reflect future capital needs of the business,” Ivankoe warned investors in his note to clients on Monday. In terms of China, Ivankoe sees “somewhat low visibility' for quarterly year over year comp and margin trends in fiscal 2014. Ivankoe believes that since Yum! Brands management team has not delivered guidance on first quarter comps, the restaurant operator will see only 8.7 percent comp growth for the full year fiscal 2014 and ten percent in fiscal 2015. Ivankoe is not convinced that Yum! Brands new menu initiatives introduced in March will win over consumers as it includes five re-launched versions of prior offerings and six dessert and drinks with no value component. On the domestic front, Taco Bell is a “gem” while KFC and Pizza Hut's margins are “low by any measure.” Taco Bell represents nearly 20 percent of global operating income and store margins are approaching 20, Ivankoe argued. Pizza Hut's margins for fiscal 2013 were around 12 percent and underperformed

who has implemented a global strategy with new technology and products. KFC margins were also around 12 percent in 2013. Ivankoe noted that Yum! Brand shares are trading at a 21.5x fiscal 2014 EPS estimates and 18.1x fiscal 2015 EPS estimates, slightly above its 17.8x seven-year average. As such, shares are fairly valued and already factor in a Chinese recovery. Ivankoe recommends

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as quick service restaurant names that could prove investors with upside opportunities. Ivankoe is estimating Yum! Brands will earn $0.82 per share on revenue of $2.743 billion in the first quarter. Shares of Yum! Brands are Neutral rated with an $80 price target.

Devina Mehra of U.K. based First Global Research upgraded shares of Yum! Brands in March as the company returned to operational profit growth in the fourth quarter while earnings per share rose four percent year over year, after three quarters of a double digit decline. Mehra believes that management's objective of 20 percent earnings per share growth is achievable “as confidence in the company's food safety returns in the most important Chinese market.” Mehra is forecasting China to grow at a compounded annual growth rate of 33 percent over the next two years given an increase in restaurant count and a rebound in capacity utilization. In other emerging markets, Yum! Brands faces little competition, Mehra argued. As a whole, Yum! Brands International will see its operating profit expand at a compounded annual growth rate of close to 7.4 percent while the domestic market will report a low single-digit growth in its operating profit. According to Mehra, Yum! Brand shares are valued attractively and trading at a discount of 14 percent to its peers on a P/E multiple basis and at a discount of 12 percent to its peers on an EV/EBITDA multiple basis. Mehra is estimating Yum! Brands will earn $0.83 per share on revenue of $2.825 billion in the first quarter. Shares are Outperform rated with no assigned price target.