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Why Yum! Brands’ First-Quarter Earnings Failed to Impress

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First-quarter performance

Yum! Brands (YUM) posted its first-quarter earnings results on May 1. In the quarter, Yum! Brands reported adjusted EPS of $0.82 on revenue of $1.25 billion. Year-over-year, the company’s revenue fell 8.5%, while its adjusted EPS fell 8.9%.

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Stock performance

During the quarter, Yum! Brands outperformed analysts’ EPS estimate of $0.81, while its revenue remained in line with analysts’ estimates. The company posted system-wide SSSG (same-store sales growth) of 4.0%, beating analysts’ estimate of 2.7%.

Despite the company’s posting better-than-expected first-quarter earnings results, its stock price fell due to lower-than-expected SSSG in its Taco Bell and Pizza Hut brands.

In the quarter, Taco Bell reported SSSG of 4.0%, missing analysts’ estimate of 4.5%, while Pizza Hut reported flat SSSG compared to analysts’ expectation of 0.5%. On May 1, Yum! Brands stock fell to a low of $100.68 before closing the day at $101.94, which represented a fall of 2.4% from its previous day’s closing price.

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Year-to-date performance

Year-to-date, Yum! Brands has returned 10.9%. In the fourth quarter of 2018, all three of the company’s brands outperformed analysts’ SSSG estimates. YUM’s strong SSSG and the strengthening of the broader equity market led to a rise in the company’s stock price. During the same period, its peers Domino’s Pizza (DPZ) and Papa John’s (PZZA) returned 9.5% and 29.3%, respectively. The broader comparative index, the Consumer Discretionary Select Sector SPDR ETF (XLY), which invests in restaurant and travel companies, returned 19.8%.

Valuation

The fall in Yum! Brands’ stock price after it posted its first-quarter earnings results also lowered its valuation multiple. On May 1, the company was trading at a forward PE multiple of 25.7x compared to 26.3x before its announcement of its earnings results.

On the same day, Yum! Brands was trading at 26.6x analysts’ 2019 EPS estimate of $3.83 and 24.0x analysts’ 2020 EPS estimate of $4.25. Analysts expect Yum! Brands’ EPS to rise 20.8% and 11.0%, respectively, in 2019 and 2020.

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