Yum! Brands Earnings Preview: China Still in Focus

Yum! Brands

, which is facing lawsuits related to its KFC brand in China, is scheduled to report its fourth-quarter and 2012 results Monday, February 4, after the markets close. Yum! Brands makes much of its revenue in China, so investors will be keeping a close eye on developments there. The company heads into this report with positive earnings momentum over the past three quarters and four-straight revenue increases.

Analysts on average predict that Yum! Brands will report that revenue for the quarter was essentially flat year-over-year, or $4.12 billion. Earnings of $0.82 per share are also in the consensus forecast. That would be up from a reported profit of $0.75 per share in the comparable period of last year. But in the past 60 days, that earnings per share (EPS) estimate has dropped from $0.84. However, Yum! Brands fell short of consensus EPS estimates in just one of the past six quarters. The third-quarter earnings of $0.99 per share beat the street view by about two percent. Strong third-quarter EPS results were attributed in part to improved margins in China. Revenues missed estimates even though same-store sales in China and the United States each grew six percent. The company also raised its full-year EPS growth guidance to "at least 13 percent." The share price rose more than four percent following the third-quarter report. For the full year, the analysts' consensus forecast calls for per-share earnings of $3.24 on revenues of $13.59 billion. That would be up from $2.87 EPS and $12.63 billion in revenue in the previous year. That earnings estimate also has pulled back in the past 60 days, from $3.27 per share.

Yum! Brands operates some 38,000 quick-service restaurants in 120 countries under the KFC, Pizza Hut, and Taco Bell brands, as well as about 450 casual dining concept restaurants in China. It is a Fortune 500 company that was founded in 1997, and its headquarters are in Louisville, Kentucky. The company has a market capitalization more than $29 billion. David C. Novak has been the chief executive officer and executive chairman since January 2001. Competitors include AFC Enterprises

, McDonald's

and Wendy's

. McDonald's posted marginally higher fourth-quarter earnings that topped expectations. Wendy's is expected to report marginal EPS growth and revenue up almost five percent, relative to a year ago, when it reports later this month. But smaller AFC, which operates Popeye's Chicken restaurants, is expected to report strong fourth-quarter and full-year results.

During the three months that ended in December, Yum! Brands announced it set aside $1 billion for share buybacks, announced expansion plans in China despite weak sales and faced allegations of tainted chicken from sources in China.

Yum! Brands has a long-term EPS growth forecast of more than 12 percent, but its price-to-earnings (P/E) ratio is greater than the industry average. The operating margin is greater than the industry average too, the return on equity is more than 77 percent and the return on investment is about 25 percent. The number of Yum! Brands shares sold short, as of mid-January, represents less than two percent of the float. But that was more than a nine percent rise in the short interest from the previous period. Of the 25 analysts surveyed by Thomson/First Call who follow the stock, 15 recommend buying shares, while only one analyst rates the stock at Underperform. The analysts' mean price target, or where they expect the stock to go, represents about 11 percent potential upside. But note that the consensus target is less than the 52-week high.

The share price has fallen almost 11 percent in the past 90 days, and shares have been trading mostly between $64 and $68 since around Christmas. The share price is below the 50-day and 200-day moving averages, which formed a death cross last week. Over the past six months, the stock has underperformed the competitors mentioned above, as well as the broader markets.