Yum! Brands — How to Play Tuesday’s Earnings Report

Global fast-food company Yum! Brands (NYSE: YUM ) reports earnings for the
quarter ending Sept. 30 on Tuesday after the market closes. While most of the
concerns in the market relate to the U.S. economy, Yum! Brands report will
provide a glimpse of economic activity across the globe. Growth in foreign
markets has been huge for the fast-food industry. Look no further than the
tremendous success of names like McDonald's (NYSE: MCD ) and Starbucks
(NASDAQ: SBUX ), both of whom have greatly been expanding overseas. For Yum!
Brands, sales overseas have grown from 39% of total revenue in 2007 to 65% at
the end of 2010. That growth in sales helped boost YUM shares by more than 100%
during the past five years. The risk to Yum! Brands is a reduction in growth if
a global recession hits. During the past four quarters, Yum! Brands quarterly
profits have been steady: Yum! Brands basically has matched analyst estimates
during the past year, but in the last quarter ending June 30, the company beat
estimates by five cents per share. Despite that performance, Wall Street
estimates for the quarter ending Sept. 30 have dropped by a penny per share
during the past 90 days. The average estimate for the period is for the company
to make 83 cents per share. For the current year, Wall Street expects Yum!
Brands to make $2.85 per share. In 2012, the average profit estimate is $3.21
per share, or 13% higher than 2011. At current prices, YUM trades for 17 times
current-year estimates of earnings. YUM shares have moved fractionally higher in
2011. Investors are taking a wait-and-see approach with the company. To date,
operating performance has met expectations, but there appears to be few
catalysts for the stock going forward. Click to Enlarge During the past 12
months, Yum! Brands has gained a paltry 6%. After an impressive run during the
past five years, growth at YUM is slowing. So far investor reaction has been
cautious, but not disastrous. Operating performance against Wall Street
expectations has been OK. Concerns about slower growth in China and the
possibility of recession elsewhere around the globe are legitimate. However, the
biggest concern for traders heading into Yum! Brands earnings report on Tuesday
would be valuation. Many companies still trade for a premium to expected growth,
with YUM being one of them. To keep a high valuation, the company needs
impressive earnings without reduced guidance for the future. I do not see a
stellar report in Yum! Brands' future. Instead, look for the company to match
Wall Street expectations or beat by the proverbial penny per share. Included in
the report will be guidance that is likely to disappoint. I expect shares to
slip by 3% to 5% as a result. Other companies reporting results this week
include Costco (NASDAQ: COST ), Marriott International (NYSE: MAR ), Monsanto
(NYSE: MON ), Ruby Tuesday (NYSE: RT ), Helen of Troy (NASDAQ: HELE ) and
Constellation Brands (NYSE: STZ ).