We expect the world's largest restaurant company in terms of system units – Yum! Brands, Inc. (YUM - Analyst Report) – to beat expectations when it reports third-quarter 2016 numbers on Oct 5, after market closes.
Last quarter, Yum! Brands posted a 1.35% positive earnings surprise. In fact, the company’s earnings surpassed the Zacks Consensus Estimate in three of the last four quarters, with an average beat of 3.08%.
Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Yum! Brands is likely to beat earnings because it has the perfect combination of two key ingredients.
Zacks ESP: Earnings ESP for Yum! Brands' stands at +1.84% because the Most Accurate estimate is $1.11 while the Zacks Consensus Estimate is pegged at $1.09. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.
Zacks Rank: Yum! Brands currently 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 estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.
The combination of Yum! Brands’ Zacks Rank #3 and +1.84% ESP makes us reasonably confident of an earnings beat.
What is Driving the Better-than-Expected Earnings?
We expect Yum! Brands’ U.S. division comps to continue to be strong in the to-be-reported quarter, backed by strength in the Taco Bell, Pizza Hut and KFC brands. Taco Bell’s expanded line of breakfast offerings should drive comps, while Pizza Hut comps will likely benefit from menu innovation and digital initiatives. Meanwhile, KFC’s revamping of outlets and introduction of healthier menu items should continue to boost comps.
Further, backed by various initiatives on the sales and digital front, Yum! Brands’ performance in some of the key developed markets is expected to remain impressive in the quarter. Meanwhile, the company’s refranchising efforts should facilitate earnings per share growth and ROE expansion.
However, slowdown in emerging markets could dent sales while negative currency translation might hurt earnings. Meanwhile, the China division posted flat comps in Q2 after recording positive comps in the previous three quarters, suggesting that a complete recovery will take more time.
Particularly, Pizza Hut in China continues to disappoint and might keep international revenues under pressure in the third quarter. Nonetheless, Yum! Brand’s KFC division in China has been performing well, aided by robust unit growth and popularity of the value box meals, and is expected to continue doing so.
Other Stocks to Consider
Yum! Brands is not the only company looking up this earnings season. Here are some other companies to consider as our model shows they also have the right combination of elements to post an earnings beat this quarter:
Wingstop Inc. (WING - Snapshot Report) has an earnings ESP of +9.09% and a Zacks Rank #2.
Restaurant Brands International Inc. (QSR - Snapshot Report) has an earnings ESP of +4.88% and a Zacks Rank #3.
Buffalo Wild Wings Inc. (BWLD - Analyst Report) has an earnings ESP of +4.00% and a Zacks Rank #3.
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