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Yum! Brands (YUM) Q1 Earnings: Stock to Beat Estimates?

We expect Yum! Brands, Inc. YUM to beat expectations when it reports first-quarter 2016 results on Apr 20, after the market closes.

Last quarter, the company posted a positive earnings surprise of 3.03%. Further, it has managed to surpass estimates in three of the trailing four quarters with an average surprise of 4.28%.

Let us see what’s in store for the company this quarter.

Why a Likely Positive Surprise?

Our proven model shows that Yum! Brands is likely to beat earnings because it has the right combination of two key components.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +2.41%. This is a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Yum! Brands has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 have a significantly higher chance of beating earnings. Meanwhile, Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions. 

The combination of Yum! Brands’ Zacks Rank #3 and +2.41% ESP makes us confident of an earnings beat.

What is Driving the Better-than-Expected Earnings?

Yum! Brands’ U.S. division comps should continue to perform well in the to-be-reported quarter, backed by strength in the Taco Bell, Pizza Hut and KFC brands. Taco Bell’s menu innovations and its hugely popular breakfast platform should drive comps, while Pizza Hut comps will likely grow on the back of the massive makeover that took place in Nov 2014, along with the recent replacement of ovens and upgrade of the in-store technology. Following their footsteps, KFC revamped its outlets last year and launched an improved website, which should boost comps. Further, backed by menu innovation, the company’s performance in developed markets like Australia, Japan and Western Europe are expected to remain impressive in the to-be-reported quarter.

However, Yum! Brands’ China division has been reeling under the impact of food safety scandals over the past two years. Further, Yum! China is facing challenges like rising labor costs and rents, labor shortages, changing consumer tastes, and intensifying competition from local brands. Slowdown in the Chinese economy recently made matters worse. In view of these issues, in Oct 2015, Yum announced that it will spin off the China business into an independent, publicly traded company. The spin-off, expected to be completed by the end of 2016, should help the company turn its business around in a more effective way.

Meanwhile, Yum!’s KFC division in China has performed well over the past few months, aided by robust unit growth and popularity of the value box meals. However, Pizza Hut in China continues to disappoint and is likely to keep revenues under pressure in the first quarter, especially due to the current economic slowdown in the country.

Other Stocks to Consider

Here are some other companies in the restaurant industry that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Dave & Buster's Entertainment, Inc. PLAY, with an Earnings ESP of +1.70% and a Zacks Rank #1.

McDonald's Corp. MCD, with an Earnings ESP of +1.74% and a Zacks Rank #2.

Bloomin' Brands, Inc. BLMN, with an Earnings ESP of +4.00% and a Zacks Rank #3.

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YUM! BRANDS INC (YUM): Free Stock Analysis Report
MCDONALDS CORP (MCD): Free Stock Analysis Report
DAVE&BUSTRS ENT (PLAY): Free Stock Analysis Report
BLOOMIN BRANDS (BLMN): Free Stock Analysis Report
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