Yum! Brands, Inc. Earnings Preview: What's In Store For 2015?

Yum! Brands, Inc. YUM, whose key China division continues to struggle, is scheduled to report its third-quarter results Tuesday, October 7, before the markets open.

The company has already warned of a sharp decline in sales in China, and it followed that up with a dividend hike -- its tenth straight year of double-digit percentage hikes -- perhaps to assuage jittery investors.

In the report, investors and analysts will have an eye on any guidance for 2015, given that a new CEO takes over in January, and in the face of rumors about a possible spin-off of the China unit.

See also: Stifel Sees Possible Yum! Brands China Spin-Off

Expectations

Analysts on average predict Yum! Brands will report that its revenue for the quarter barely increased year-over-year to $3.48 billion. Earnings of $0.89 per share are also in the consensus forecast. That would be up from a reported profit of $0.85 per share in the comparable period of last year.

Note that the consensus earnings per share (EPS) estimate has dropped in the past 60 days from $1.01, and individual estimates range widely from $0.77 to $1.22. The company fell short of analysts' EPS expectations in the previous quarter by a penny, after topping consensus estimates in the two periods before that.

In the second-quarter report, CEO David Novak remarked, "Yum! Brands is well on its way to delivering full-year EPS growth of at least 20 percent...I'm confident we are building momentum behind major initiatives around the world that will sustain double-digit EPS growth in 2015 and beyond."

Yet, the company's share price fell more than 10 percent in the days following the second-quarter report.

Looking ahead, the forecast for the current quarter so far calls for revenue almost 4 percent higher than a year ago, as well as EPS the same as that projected for the three months that ended in September. Full-year revenues are predicted to be up almost 5 percent, while earnings are about 13 percent higher than in the previous year.

The Company

Yum! Brands operates, franchises and licenses quick-service restaurants primarily under the KFC, Pizza Hut and Taco Bell banners. The company has more than 40,000 restaurants in about 125 countries, making it one of the largest in the world by that measure.

This S&P 500 component has a market capitalization near $31.4 billion, and it is headquartered in Louisville, Kentucky.

The company was founded in 1997. David Novak has been the chairman of the board since 2001 and chief executive since July 2000. He will be succeeded as CEO by Greg Creed, CEO of Taco Bell, in January.

Yum! Brands' competitors include McDonald's, for which declines on the top and bottom lines are forecast for the third quarter, as well as Chipotle Mexican Grill and Domino's Pizza. The latter two are expected to post solid growth on the top and bottom lines for their most recent quarters.

During the three months that ended in September, Yum! Brands opened its first KFC in Brazil, announced an 11 percent hike in its dividend, opened its first Pizza Hut in Africa and extended its sponsorship agreement with the Kentucky Derby for another five years.

See also: 6 Of The Most Successful Fast-Food Campaigns Of All Time

Performance

Yum! Brands has a long-term earnings per share growth forecast of around 15 percent, and its price-to-earnings (P/E) ratio is less than the industry average. Its operating margin is greater than the industry average, and it has a return on equity of more than 54 percent. It now offers a dividend yield near 2.3 percent.

Note that the number of Yum! Brands shares sold short, as of the most recent settlement date, represented less than 2 percent of the total float. Short interest has risen in the past three periods but is still well less than the year-to-date peak back in January. At the current average daily volume, it would take a little over two days to close out all short positions.

Of the 22 analysts surveyed by Thomson/First Call who follow the stock, only nine recommend buying shares. Note that there are fewer buy recommendations than there were two months ago. But a move to the analysts' mean price target would be a 10 percent gain for the shares.

Shares have yet to recover from the tumble following the second-quarter report, and they have traded mostly between $71 and $73 since mid-August. The 50-day and 200-day moving averages formed a death cross in early September, in particular.

Over the past six months, the stock has underperformed not only the broader markets, but the competitors mentioned above as well.

At the time of this writing, the author had no position in the mentioned equities.