YUM! Brands: The Scandal is Forgotten, Q2 Looks Brighter

YUM! Brands, Inc. (NYSE:YUM) has my attention today after I observed a decent in rally that led to the stock to setting a new 52-week high of $87.42 yesterday. YUM! Brands with its market capitalization of $37.75 is a quick service restaurant company based on number of system units, with over 40,000 restaurants in more than 125 countries and territories. The Company has more than 14,000 restaurants, nearly twice as many as the nearest competition.

Why We Are Looking at YUM Today

The main reason that attracted me to the options of YUM! Brands is the bullish momentum that saw the stock setting a new 52-week high yesterday. The share price of Yum Brand has been rising steadily in the last week as the soared 8.37% in the last month. The chart below provides interesting insight into the bullish momentum behind Yum Brands.

Yum Chart 1

A psychological barrier at an $82 resistance point has limited the stock for much of the last one year as the red bar shows. The shaded area (purple) shows how the shares of Yum Brands have traded in an erratic manner for much of the second half of 2014 after the company was enmeshed in a Chinese food safety scandal involving one of its suppliers, OSI LLC. It was reported that the meat supplier sold expired beef and chicken products. In fact, the TV report showed the workers of the supplier picking meat from the floor of the factory and packing expired meat with fresh meat.

Yum severed ties with the supplier, but the damage had already been done. The scandal took its toll on Yum’s top and bottom line and the company missed estimates in Q4 2014. In fact, the company reduced its 2014 EPS guidance and it provided a cautious “at least 10%” 2015 EPS guidance.

However, the company started the 2015 on a fresh note as investors put the effects of the OSI scandal behind and as the company refocused its energy on restoring consumer confidence. Hence, the stock started 2015 with a decent rally (blue arrow) that led the stock to establishing another range with a $78 support and an $81 resistance. Interestingly, Yum Brands’ efforts paid off as the company reported a strong Q1 that beat estimates and the market responded by allowing the shares of Yum Brands to breakout above $86.

Is the Breakout Sustainable?

The first quarter results that precipitated the breakout in the shares of Yum Brands show that the company is already out of the woods. Yum Brands reported Q1 EPS of $0.80 per share to beat the consensus estimate of $0.72 per share – earnings were down 8% year-over-year. The company reported first quarter revenue of$2.62B in line with estimates – revenue was down 4% year-over-year.

Yum Brands’ China division reported a 12% decline, which is worse than the 9% improvement from the year ago quarter; however, it shows an improvement over the 16% decline Q4 when the news of the scandal was still hot.

How to Trade YUM Options

Yum Brand’s China division is very important to the company as it generates about one-third of the company’s profits. Hence, the recovery being recorded in that market shows that the company is back on track to profitability. More so, the company’s expansion plans especially in emerging markets and its shareholder-friendly initiatives suggest that the company will perform much better in the second half of the year.

Yum Brands has a Number 2 Zacks Rank “Buy” and analysts expect its earnings to grow by 12.60% this year and by another 17.20% next year. Hence, I recommend buying YUM call options, you should consider the YUM Oct 2015 90.000 call (YUM151016C00090000) at an asking price of $3.88.

— Daily Option Alerts

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