Will Yum! Brands' (YUM) Q1 Earnings Disappoint Estimates? - Analyst Blog
Louisville-based restaurant chain Yum! Brands, Inc. YUM is set to report first-quarter 2015 results on Apr 21.
In the last quarter, the company posted a negative earnings surprise of 6.15%, mainly due to negative publicity associated with a meat supplier scandal, which hurt its China Division. Let’s see how things are shaping up for this announcement.
Factors to Consider
With the negative impact of improper food handling scandal, which took place in Jul 2014, it would be once again difficult for the company to post positive comps growth in the China division in the first quarter. Shanghai Husi Food Co. — a division of OSI Group LLC and former food supplier of Yum! — was reportedly found reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat.
This affected consumer confidence, thereby lowering comps in the months that followed. Since the scandal, the company has been witnessing sales declines at its KFC and Pizza Hut units in the country.
In fact, during the third-quarter 2014 conference call, Yum! announced that revenues in China would take six to nine months to recover. Further, the slowdown in the Chinese economy is adding to the company’s woes.
However, we believe that the company’s U.S. division is poised to turn around in the to-be-reported quarter. Taco Bell’s menu innovations and its hugely popular breakfast platform should drive first-quarter comps, while Pizza Hut’s comps will likely grow on the back of the massive makeover which took place in Nov 2014.
The Pizza Hut overhaul included new crust flavors, sauces and toppings, combined with healthy menu items and giving its logo a facelift. In addition, the company modernized its online ordering platform. Such efforts should boost first-quarter comps, especially when the U.S. fast-casual pizza industry is growing by leaps and bounds.
Earnings Whispers
Our proven model does not conclusively show that Yum! is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: The company’s Earnings ESP stands at -1.37%. This is because the Most Accurate estimate is 72 cents, while the Zacks Consensus Estimate is pegged at 73 cents.
Zacks Rank: Yum!’s Zacks Rank #3 (Hold) increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.
We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement.
Stocks to Consider
Here are some companies in the restaurant sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Chipotle Mexican Grill, Inc. CMG, with an Earnings ESP of +3.34% and a Zacks Rank #2 (Buy).
BJ's Restaurants, Inc. BJRI, with an Earnings ESP of +3.57% and a Zacks Rank #1 (Strong Buy).
Jack in the Box Inc. JACK, with an Earnings ESP of +3.03% and a Zacks Rank #1.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
YUM! BRANDS INC (YUM): Free Stock Analysis Report
CHIPOTLE MEXICN (CMG): Free Stock Analysis Report
BJ'S RESTAURANT (BJRI): Free Stock Analysis Report
JACK IN THE BOX (JACK): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
