Market Overview

Yum! Brands Earnings Preview

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Yum! Brands (NYSE: YUM) will be reporting its second-quarter 2011 results Wednesday, July 13, after the markets close. Investors will be watching to see if analysts are correct that growth in China and emerging markets will offset recent struggles at the company's Taco Bell unit.

Analysts are looking for the company to report per-share earnings of $0.61, which is up from $0.58 per share in the same period of last year. The consensus earnings estimate is unchanged in the past 60 days. Analysts also expect to see revenues of $2.7 billion, an increase of 4.8% from a year ago.

Note that Yum! Brands has topped consensus earnings estimates in recent quarters but it missed expectations by a penny per share in the first quarter. Analysts so far are looking for sequential and year-over-year growth of both earnings and revenue for the current quarter.

The Company

Louisville, Kentucky-based Yum! Brands is the world's largest quick-service restaurant operator (by number of locations) with around 37,000 restaurants in more than 100 countries and territories under the KFC, Pizza Hut, Taco Bell, Long John Silver's, and A&W All-American Food Restaurants brands. Franchisees, affiliates and licensed operators run approximately three-quarters of the company's restaurants. Yum! Brands was founded in 1997.

During the three months that ended in June, the company took the first steps to acquiring China's Little Sheep restaurants, announced plans to bring free wi-fi to all U.S. Taco Bell locations, and brought the bunless Double Down sandwich back to KFC locations in Canada.

Performance

The long-term earnings per share growth forecast is 12.9%, the return on equity is 85.8%, and the dividend yield is 1.7%. The company's net cash flow from operations has grown in recent quarters, while short interest had fallen over the past year to about 1.2% of the float. The consensus recommendation of analysts is to buy the stock; 10 of 21 analysts following Yum! Brands rate its stock a Buy or Strong Buy.

The share price is more than 13% higher than at the beginning of the year. During that time, the stock has outperformed larger (by sales) competitor McDonald's (NYSE: MCD), as well as the industry average and the broader markets.

Action Items:

Bullish: Traders who are optimistic about the fast-food industry also might want to consider the following trades:

  • PowerShares Dynamic Food & Beverage Portfolio (NYSE: PBJ): +10.4% year to date
  • PowerShares Dynamic Consumer Discretionary Sector Portfolio (NYSE: PEZ): +9.1% year to date
  • Vanguard Consumer Discretionary Index Fund (NYSE: VCR): +8.9% year to date
  • Consumer Discretionary Select Sector SPDR Fund (NYSE: XLY): +8.5% year to date

Bearish: Traders who believe that opportunities may be better in the commodities that supply the fast-food industry may want to consider these alternate positions:

  • Teucrium Corn Fund (NYSE: CORN): +10.2% year to date
  • UBS E-TRACS UBS Bloomberg CMCI Livestock TR ETN (NYSE: UBC): +4.9% year to date
  • iPath Dow Jones-UBS Sugar Subindex Total Return ETN (NYSE: SGG): +4.1% year to date

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