MorningWord 10/7/15: Yucking Your $Yum

by Dan October 7, 2015 9:28 am • Commentary

I assure you this post is NOT a victory lap.  But over the past couple years we have had some choice words as it relates to the guidance given by Yum Brands (YUM), and specifically whether or not their management (old and new) have a credibility problem as it relates to their communication with investors.

Here were some thoughts about their full year 2015 guidance (which they just whiffed on) following their Q4 results back in early February:

YUM released Q4 results last night that were below consensus, but generally in line with re-set expectations. The company expects China weakness to continue and the “pace of the recovery is slower than expected”.  The company said they are “committed to 10% eps growth in 2015”.  This seems hopeful for a company that has not achieved this goal for the last two years.  The company suggests that a rebound in China in the second half of 2015 will be the impetus for double digit eps growth.  I view this guidance as squishy at best.  I am shocked the stock is up. It is my view that management has a massive credibility problem and after listening to the Q&A on the conference call the company is doing their best to put lipstick on a pig.

This morning, the stock is down 16%, just above $70 in the pre-market (round-tripping its entire 2015 move) as the company last night lowered their full year guidance and suggested that they will not hit their prior commitment of 10% eps growth, now looking more like low to mid single digits. So here is the part about not feeling that smart. Where my skepticism wasn’t financially rewarded. The stock rallied 30% from early February, making a new all time high in early May after it was revealed that activist investors were building sizable positions in the stock:

YUM 1yr chart from Bloomberg
YUM 1yr chart from Bloomberg

I have been right on the story but wrong in the markets.  To take the other side of management’s guidance it takes more than healthy skepticism, its takes conviction, and it takes a commitment of capital. I have not been trading (fading) the strength in YUM this year as the stock made little sense, rising most of Q1 & Q2 as activists built positions.  And why would a little trader like me take the other side of activists who have collectively built a 20 million share position with the sole intent of pushing management to unlock shareholder value? If I were able to commit considerable resources to the idea, what I would have done in the Spring is go to China, where YUM gets more than half their sales, and where management expected the company to hit their second half targets, and met with franchisees, competitors, suppliers etc. That’s how you debunk management BS, the sort that it appears that YUM has been spewing for at least a couple years.  I am just very surprised that funds as smart as Dan Loeb’s Third Point had placed greater emphasis on their plans for the company as opposed to the company’s current fundamentals and the potential that management has a poor handle on their own businesses’ visibility.

I want to reiterate a point I made yesterday in this space (MorningWord 10/6/15: Active Activism) regarding activist investing:

activist investing is a bull market strategy. So if you think the bull is back on, buy potential or stated targets. But recognize that most activists see problems that they want to help fix, and this is a much easier endeavor in a market that rises amid prospects of an improving economy. I am not sure either condition is being met.

As for YUM, I suspect activists who liked the stock in the $70s & $80s like it more in the $60s, and this mishap may only embolden them.  If the stock can stabilize in the low $70s it may be worth a shot on the long side.  But importantly a series of closes below the uptrend that has been in place since late 2008 means the stock is broken:

YUM 8 year chart from Bloomberg
YUM 8 year chart from Bloomberg

Oh, and one more thing. A meaningful break of the uptrend in a stock like YUM. A stock that has encapsulated so much enthusiasm about the growth of China’s growing middle class, a demographic that seems to be driving lots of U.S. multinational’s growth plans would likely be one more sign that the 7 year bull market in stocks is ending.