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What's in the Cards for Yum! Brands (YUM) in Q3 Earnings?

Yum! Brands, Inc. YUM is scheduled to report third-quarter 2017 numbers on Nov 2, before the opening bell.

Last quarter, the company delivered a positive earnings surprise of 11.48%. In fact, it outpaced/met earnings estimates in the trailing four quarters, with an average beat of 7.01%.

Yum! Brands, Inc. Price and EPS Surprise


Yum! Brands, Inc. Price and EPS Surprise | Yum! Brands, Inc. Quote

We note that though increased focus on refranchising may boost earnings in the to-be-reported quarter, it is expected to hamper revenue growth. Meanwhile, negative currency translation is likely to hurt the company’s profits.

In fact, the Zacks Consensus Estimate for third-quarter earnings of 66 cents implies a year-over-year decline of more than 39.5%. The same for revenues is pegged at $1.39 billion, 58.2% lower than the prior-year quarter figure.

Also, our quantitative model predicts that Yum! Brands does not have the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: Yum! Brands has an Earnings ESP of -0.46%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Yum! Brands carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of an earnings beat.

Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors Likely to Influence Q3 Results

Post China business separation, Yum! Brands endeavors to drive growth by employing greater focus on the development of its three iconic global brands, increasing its franchise ownership, and creating a leaner and more efficient cost structure bodes well. This, in turn, is likely to bolster third-quarter results.

Particularly, augmented pace of unit development along with increased investments in technology-driven initiatives is anticipated to somewhat drive top-line growth in the quarter.

At Taco Bell, the brand’s value-driven, innovation-focused model, inventive marketing strategies and expansion of delivery program are likely to boost comps.

Coming to the Pizza Hut brand, while the international division might continue doing well, Pizza Hut U.S. is expected to post soft results for the quarter despite numerous strategic efforts similar to the last few quarters. Notably, a soft consumer spending environment in the U.S. restaurant space is likely to continue restricting revenue growth.

Meanwhile, KFC’s efforts to revamp outlets, focus on its operational excellence, delivery services, innovation and convenience are expected to continue boosting comps.

However, Yum! Brands is likely to witness a decline in company sales due to the impact of its strategic refranchising initiative, which, in turn, will lower the company’s revenues in the third quarter. A slowdown in emerging markets are likely to further hamper the quarter’s performance.

Stocks to Consider

Here are a couple of stocks, which, as per our model, have the right combination of elements to post an earnings beat this quarter.

El Pollo Loco Holdings, Inc. LOCO has an Earnings ESP of +1.65% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Noodles & Company NDLS has an Earnings ESP of +66.67% and a Zacks Rank #3.

DineEquity, Inc. DIN has an Earnings ESP of +5.14% and a Zacks Rank #3.

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