We expect Yum! Brands, Inc. YUM to beat expectations when it reports fourth-quarter and full year 2015 results on Feb 3, after the market closes.
Last quarter, the company posted a negative earnings surprise of 6.54%. However, the company has surpassed earnings estimates in two of the trailing four quarters with an average four-quarter surprise of 1.99%.
Let us see what is in store for the company this quarter.
Why a Likely Positive Surprise?
Our proven model shows that Yum! Brands is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +4.55%. This is a very meaningful and leading indicator of a likely positive earnings surprise.
Zacks Rank: Yum has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings. Meanwhile, the Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement.
The combination of Yum! Brands’ Zacks Rank #3 and +4.55% ESP makes us confident of an earnings beat.
What is Driving the Better-than-Expected Earnings?
Yum! Brands’ U.S. division comps should continue to perform well in the to-be-reported quarter supported by the strength in its Taco Bell, Pizza Hut and KFC brands. Taco Bell’s menu innovations and the hugely popular breakfast platform should drive comps, while Pizza Hut’s comps will likely grow on the back of the massive makeover which took place in Nov 2014. KFC also revamped its outlets last year and launched an improved website, which should boost comps.
Yum! Brands’ China division has been reeling under the impact of food safety scandals over the past two years. Further, Yum! China is facing challenges like rising labor costs and rents, labor shortages, changing consumer tastes and intensifying competition from local brands. The slowdown in the Chinese economy recently made matters worse. In view of these issues, in Oct 2015, Yum announced that it will spin off the China business into an independent, publicly-traded company. The spin-off, expected to be completed by the end of 2016, should help the company to turn around in a more effective way.
Meanwhile, Yum!’s China Division has posted comps growth in 2 of the past 3 months, mainly backed by solid performance at the KFC division. However, Pizza Hut in China continues to disappoint and is likely to keep revenues under pressure in the fourth quarter, especially with the current slowdown in the Chinese economy.
Other Stocks to Consider
Here are some companies in the restaurant industry that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Dave & Buster's Entertainment, Inc. PLAY, with an Earnings ESP of +4.76% and a Zacks Rank #1.
Kona Grill Inc. KONA, with an Earnings ESP of +5.88% and a Zacks Rank #2.
Cracker Barrel Old Country Store, Inc. CBRL, with an Earnings ESP of +3.16% and a Zacks Rank #1.
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