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Yum! Brands Stock Falls after Longbow’s Downgrade

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YUM’s performance

After Longbow Research’s downgrade, Yum! Brands (YUM) was down 0.8% in early morning trading on July 1, while the S&P 500 Index was up more than 1.0%.

However, before the downgrade, the company was trading at $110.67 at the end of the day of June 28, implying a rise of 20.4% YTD (year-to-date). This year, Yum! Brands has outperformed the broader equity market and its peers. The S&P 500 Index has returned 17.3%, while peers Domino’s Pizza (DPZ) and Papa John’s (PZZA) have returned 12.2% and 12.3% YTD, respectively.

Yum! Brands’ stock price was boosted by strong performances from KFC in the fourth quarter of 2018 and the first quarter of 2019. In the fourth quarter, KFC reported SSSG (same-store sales growth) of 3.0% compared to analysts’ expectation of 2.8%. In the first quarter of 2019, the brand reported SSSG of 5.0%, beating analysts’ expectation of 2.7%. Also, in the first quarter, YUM outperformed analysts’ EPS expectations.

On June 6, Nation’s Restaurant News reported that data collected from Black Box Intelligence, a division of TDn2K, indicated that same-restaurant sales across various restaurant brands had increased 1.1% in May. In April, same-restaurant sales had fallen 1.6%. The announcement of growth in restaurants’ same-store sales in May and the strengthening of the broader equity market also contributed to the rise in Yum! Brands’ stock price.

Valuation multiple

The increase of 20.4% in Yum! Brands’ stock price since the beginning of this year has also raised its valuation multiple. On June 28, the company was trading at a forward PE multiple of 27.5x compared to 24.2x at the beginning of this year. In comparison, its peers Domino’s Pizza and Papa John’s were trading at forward PE multiples of 27.4x and 32.6x, respectively.

On June 28, Yum! Brands was trading at 29.0 times analysts’ 2019 EPS estimate of $3.82 and 26.1 times analysts’ 2020 EPS estimate of $4.24, with its EPS expected to rise 20.6% in 2019 and 10.8% in 2020.

On June 25, Credit Suisse initiated coverage on McDonald’s (MCD) with an “outperform” rating. If you’re interested in reading about what led Credit Suisse to rate McDonald’s as a “buy,” be sure to read our recently published series McDonald’s: Credit Suisse Starts Coverage on Its Stock.

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