YUM: Report Q4 After the Close, Our Preview

by Dan February 6, 2012 3:08 pm • Commentary

YUM ($63.33) report Q4 tonight after the bell.   No New Trade, But there is a theoretically Bearish trade

-The options market is implying about a 3.4% move which appears rich to the 4 qtr avg move of about 2.75%.

YUM last 4 qtr price action around earnings from LiveVol Pro

-Implied volatility is obviously elevated into earnings with at the money implied vols at about 26 vs the 30 and 90 day realized of 12 and 17 respectively and 30 day implied vol of about 24.50.   Largest open interest increases in the last 60 days has been in the Feb and March 60 Puts, showing a bit of caution as the stock has been making new all time highs almost every day in that same period.

-The street is fairly positive on the name with 15 Buys, 6 Holds and only 1 Sell, while short interest is fairly low at a tad more than 1% of the float.

-The chart is a monster, with the stock up about 7% ytd, which is basically inline with the SPX, but up about 35% from the intra-day lows in Oct.

[caption id="attachment_8604" align="aligncenter" width="300" caption="3 Yr YUM chart from Bloomberg LP"][/caption]


-Valuation is slightly rich to its peers at ~19.5x 2012 expected earnings, for a company that is supposed grow eps 13% yoy and sales only 7%.    MCD trades at about 17.3% expected 2012 earnings but earnings growth projected at only about 9%.

-China, China, China……China is expected to contribute 42% of YUM’s earnings in 2011 and 45% in 2012…..So YUM’s multiple premium to MCD is likely a clear play on China, as YUM has about 4300 KFC and Pizza Hut Stores in Chinia vs MCD’s 1300 stores…..so as fears of a “hard landing” have permeated the markets, investors get worried about stories like YUM that are so levered to the country’s continued growth.

IN a note to clients dated Dec 8th 2011, Merrill Lynch had the following to say about YUM’s business in Chinia:

Transaction growth and pricing should drive China comps Yum’s China business has enjoyed extraordinary sales growth in 2011. Through the first three quarters of 2011, Yum China has recorded same store sales growth of 17% and total system sales growth of 27% in constant currencies helped by higher wage rates in China that have increased income levels and boosted sales.

Comparisons will obviously be difficult in 2012 but we are confident in our
projection for China same store sales growth of 8% because we expect continued transaction growth helped by relatively new sales layers such as breakfast (8% of sales), delivery and 24 hour operations as well as much higher pricing.

MY TAKE: I have a fairly strict policy of not buying stocks that are at or near all time highs no matter what the potential catalyst.  I wouldn’t expect too many surprises as it relates to their Q4 since the company held and analyst meeting in early Dec, and the stock is likely to trade on forward guidance.  And that’s the gazillion dollar question, how cautious will the company be about prospects in China?  I guess if it were me, with the stock within a couple % of all time highs I would cautiously optimistic, especially when you consider that MCD and CMG only traded off about 2% following their own earnings, and both have since recovered.

So, As I just stated, I don’t buy stocks that are on runaway breakouts, but if the company guides somewhere within consensus estimates I would expect the stock to trade down to about $61.  With options only listed in $5 increments I don’t see much to do short dated, but maybe, just maybe I would look at the March Put Flys if I had a good reason to be Bearish (which I don’t).

Theoretical Bearish Trade:  THIS IS NOT A TRADE I AM PUTTING ON, but for those who think the company could disappoint on guidance this could be a low premium way to play with a potential 8 to 1 pay out if the stock was down 12% on March Expiration.

YUM ($63.33) Buy March 60/55/50 Put Fly for about .55

-Buy 1 Mar 60 Put for 1.05

-Sell 2 Mar 55 Puts at .64  (.32 each)

-Buy 1 Mar 50 Puts for .14

Break-Even on March Expiration:

Profits btwn 59.45 and 55 of up to 4.45, with max gain of 4.45 at 55, profits trail off btwn 55 and 50.55

Losses of up to .55 btwn 59.45 and 60 and 40.55 and 50, with max loss of .55 above 60 and below 50.00


The trade has almost a 10 to 1 payout, but you need a 6% move just to break-even


Here is a quick Preview From Bloomberg:

By Courtney Dentch

Feb. 6 (Bloomberg) — Yum! Brands likely to give update on
food, labor cost pressures in China when it reports 4Q postmkt

• 4Q adj. EPS est. 74c (range 72c-76c)
• 4Q rev. est. $4.03b (range $3.93b-$4.24b)
• 4Q comp. sales ests. (avg. of 6):
• Currency may add 1c-2c to 4Q EPS: Barclays
• Global restaurant margins may fall 130bps on food, labor costs, primarily in China: Deutsche Bank
• Raymond James sees China restaurant margins down 185bps; China took 7% price increase in 2011 to offset food, labor cost increases: Jefferies
• Watch for comments on Jan. sales in China, helped by early Chinese New Year: Deutsche Bank
• YUM likely to reiterate FY2012 forecasts: Jefferies; co. in Dec. saw EPS growth at least 10%, est. 13% implies $3.24 based on 2011 EPS est. $2.86; saw 1,500 new intl restaurants
• U.S. comp. sales expected to decline for 4th straight qtr; plans to drive sales, including upgraded core menu items, breakfast rollout at Taco Bell, not likely to help until 2H: Jefferies
• YUM met, beat EPS, rev. ests. in 7 of last 8 qtrs; shrs gained as much as 4.1%, fell as much as 5.5% on last 8 reports
• YUM up 7.5% YTD vs MCD down 0.6%, WEN down 9.3%