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Ride the Momentum in YUM! Brands, Inc. Stock, But Be Prepared to Jump

Josh Enomoto

With the emergence of the “fast-casual” sector, such as Panera Bread Co (NASDAQ:PNRA) or Chipotle Mexican Grill, Inc. (NYSE:CMG) before its food-poisoning scandals, pure fast-food plays have been suspect. Why eat at a McDonald’s Corporation (NYSE:MCD) restaurant when other options offer a much better experience? Still, Yum! Brands, Inc. (NYSE:YUM) holds strong, and YUM stock holds even stronger.

Ride the Momentum in YUM Stock, But Be Prepared to Jump

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Year-to-date, the YUM stock price has gained over 26%, helped in large part to its steady stream of customers.

More importantly, YUM is beating out many of its competitors, whether they’re in fast food or fast casual. For instance, Papa John’s Int’l, Inc. (NASDAQ:PZZA) is down a shocking 31% YTD, while Domino’s Pizza, Inc. (NYSE:DPZ) is up 9%. Both pizza companies are key rivals to Pizza Hut, which is under the YUM umbrella.

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Against fast casual, the aforementioned Chipotle is down nearly 27% YTD, which InvestorPlace contributor Luke Lango argues might not recover. Aside from the unforgivable continuation of food-safety problems, CMG nevertheless trades at a “14% premium to YUM stock.” I’d think this was “fake news” if I didn’t know any better.

Even when stacked up against legitimate sit-down restaurants, YUM dominates. Darden Restaurants, Inc. (NYSE:DRI) lags, having gained only 13%. Some individual names, like BJ’s Restaurants, Inc. (NASDAQ:BJRI), are in crisis mode. Surprisingly, trendy, millennial-friendly Cheesecake Factory Inc (NASDAQ:CAKE) is off the pace this year by a 27% margin.

For all the talk about hip, socially conscious millennials, they apparently love their fast-food chains. The consistently rising YUM stock price is a testament. You can’t argue with performance, and therefore, I’m not going to cast aspersions on YUM. I’m a buyer for now.

Still, I’m not sure how long this ride will last.

YUM Stock Is a Winner… for Now

On the surface, everything seems to be firing on all cylinders. A few days ago, YUM released its third quarter 2017 earnings result to much fanfare. The company reported earnings per share of 68 cents, beating consensus estimates by a penny. In addition, the result exceeded the year-ago quarter’s 56-cent haul by a 21% margin.

On the revenue side, YUM mustered $1.44 billion, exceeding analysts’ expectations for $1.39 billion. Largely, the outperformance resulted from same-store sales growth increases for its entire restaurant division. Most notably, as reported by our own William White, same-store sales increased “by 4% at KFC, 1% at Pizza Hut and 3% at Taco Bell.”

Strong revenue trends at the aforementioned three eateries is critical for YUM stock. Among the top ten most valuable fast-food brands, KFC and Pizza Hut rank number four and number five, respectively. Taco Bell sits in ninth place; however, that might change for the better.

According to Statista.com, Chipotle ranks just slightly above Taco Bell. Considering all the food-poisoning drama, Taco Bell has a legitimate chance of overtaking Chipotle in the rankings. Given the reputation of Taco Bell being “fake” Mexican food, Chipotle is on the brink of total humiliation.

YUM stock also benefits from a broader portfolio. A recent study indicated that millennials who eat fast food prefer pizza and Mexican food over traditional burgers and fries. Pizza Hut, especially now, is taking it to Papa John’s. Also, Pizza Hut ranks higher than Domino’s Pizza by a very comfortable margin.

That’s the good news for YUM stock, and it’s more than good enough for people today to buy. Further along the road, though, is where I have questions.

Millennial Trends Will Negatively Impact YUM Stock

I think we’ve all heard this thousands of times: Millennials want authenticity. How in high heaven is Taco Bell authentic? Don’t answer that — that’s a rhetorical question.

Due to the young generation’s ethnic diversity, tastes vary considerably. According to MarketWatch‘s Ciara Linnane, they “favor fresh food, high-quality ingredients, the ability to see food being prepared, customization, a pleasant dining environment and the use of technology to improve both convenience and communication.”

Again, this contradicts the corporate, fast-food business’ bottom-line-driven mentality. I’m not sure what ingredients I’m getting from KFC, Pizza Hut or Taco Bell, but I know one thing: they ain’t healthy!

Perhaps younger millennials are pumping money into fast-food eateries, driving up the YUM stock price. As I said before, you can’t argue with performance. YUM is a buy until further notice. But what I can argue is the demographics and the culture. Once enough millennials start earning serious cash, I’ll be surprised if they’re still eating at Taco Bell.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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