Q3 Preview: Yum! (YUM) Looks to China as U.S. Struggles Continue


Yum! Brands ( YUM ) is trading stronger Tuesday afternoon, heading into its third-quarter earnings report.

After the market closes, Yum! should report earnings of 83 cents per share on revenue of $3.10 billion. Earnings would be a 26 percent gain from last quarter, and 13.7 percent increase from 73 cents per share reported the same period last year.

Acting rather steadfast amid market turmoil, Yum! shares rose about 0.3 percent to $54.37 at the end of August. The stock is down 10 percent since the end of the period, and 1.1 percent better on the year.

Yum! is currently selling for 15 times fiscal 2012 earnings expectations, just about in-line when compared with 14.3 times for Domino's Pizza ( DPZ ) and 14.9 times for McDonald's ( MCD ).

Data from Bloomberg has 13 analysts with a Buy rating, 8 at Hold, and 1 with a Sell. The Street price target average is $59.50, with a low of $54 and high of $65. Yum! has traded in a range of $46.09 to $57.75 over the last 52-week period.

Analyst Comments
  • Deutsche Bank is modeling earnings of 82 cents per share and revenue of $3.106 billion. Comps in the U.S. expected to drop 3 percent, gain 2.5 percent for International, (YRI) and 14 percent of gain in China. Deutsche comments, "While the tenor of the macro data from China has softened a bit of late, we do not see much risk to 3Q results. YUM hosted an investor mtg. in Shanghai in early Sept, and we did not sense any material change in tone. (3Q ended on Aug 31 for YUM's China segment.) Plus, China macro data such as retail sales and exports remained strong into Aug."

    Notably, Deutsche found little correlation between Yum! sales and certain China economic data. Highest correlation's occurred when compared with "inflation measures, CPI "food" and PPI "food" (+80% and +85% resp.)."

  • Wells Fargo sees earnings of 81 cents per share, with potential upside coming from China. On China, Wells sees comps increasing 15 percent, with YRI up 4 percent, and a drop of 2 percent in the U.S. Wells comments, "YUM's latest guidance (July 2011) was for 9% food cost inflation in China for FY2011. In addition, labor cost inflation is expected to be up in the mid to high teens this year. However, we also note that higher wage rates should benefit consumer spending. We also were somewhat encouraged by the uptick in China consumer confidence in August sequentially, when the index rose 0.1 point to 86.21, although we note that the index remained 0.15 points lower on a year over year basis."

    Notably, Wells also views Taco Bell's new Chicken Flatbread sandwiches as an "exceptional value."

  • J.P. Morgan is looking for earnings of 81 cents per share in the quarter. China comps expected to increase 13 percent and YRI up 2 percent, JPMorgan is bullish on the prospects for expansion in India, targeting KFC and Pizza Hut delivery as the two bigger opportunities in the region.
Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of their release. You can also check out Yum!'s past performace at Streetinsider's Yum! Income Statement .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Stocks

Referenced Stocks: DPZ , MCD , YUM



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