Yum! Brands Inc. (YUM), a leading worldwide hospitality company, posted better-than-expected, second-quarter 2010 results on July 13, 2010, driven by its robust performance in the China division. The recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term outlook on the stock are covered in depth below.
 
Earnings Report Review

Yum!  reported second-quarter 2010 adjusted earnings of 58 cents per share, surpassing the Zacks Consensus Estimate by 2 cents. Earnings also soared 17% year over year. Total revenue leaped 3.0% year over year to $2.2 billion,  stemming from a 23% growth in the China division and 4% growth in YRI, but were somewhat offset by a 12% fall in the U.S. division.
 
Comparable-restaurant sales spiked 4% in mainland China. However, comparable-restaurant sales nudged up 1% in the international markets and remained flat in the U.S.
 
(Read our full coverage on this earnings report: Yum! Tops Zacks View)

Earnings Estimate Revisions: Overview

Following the earnings release, the Zacks Consensus Estimate for the company remained stable, implying that the analysts do not see meaningful catalysts for the time being. The earnings estimate details are discussed below.
 
Agreement of Estimate Revisions
 
As far as earnings estimate revisions are concerned, a positive inclination can be witnessed for fiscal 2010 and 2011, but analysts remain negative on Yum! in the near term.
 
For third-quarter 2010, the estimate revisions trend though mixed drifted to the negative side. There were 2 (out of 18) upward revisions in the last 30 days, while 9 analysts lowered estimates. Most of the analysts have reduced their estimates for the second half of 2010. The company expects labor and commodity inflation to scale up in its China division, which accounts for around 35% of its profit.
 
The overall trend in annual estimates is also mixed, with 11 out of 19 upside revisions for fiscal 2010 in the last 30 days. Only 3 analysts lowered their 2010 estimates in the last 30 days. Analysts have raised their estimates to reflect the uptick in the quarter results and anticipate margin expansion along with improving same-store sales trends in the U.S. in 2010. However, a few have reduced their estimates as a modest comps recovery in China and Yum! Restaurants International (“YRI”) is expected.
 
For 2011, 7 out of 20 analysts have increased their estimates, 5 have reduced their estimates in the last 30 days.
 
Magnitude of Estimate Revisions

Earnings estimates fell by 1 cent for fiscal 2010 and remained unchanged for fiscal 2011, over the last 30 days. The magnitude of estimate revisions indicates that the Zacks Consensus Estimate has remained static since the earnings release. In the last 7 days, the Zacks Consensus Estimate for fiscal 2010 climbed 1 cent to $2.48 and for fiscal 2011 it remained at $2.78.
 
Yum! in Neutral Lane
 
Yum! remains on course to achieving its annual earnings per share growth target of at least 12% through unit development, comparable-store sales growth, restaurant operating margin expansion, and share repurchases. We believe that the company’s overseas expansion remains one of its key growth drivers. The company’s well-diversified growth model includes an annual operating profit growth of 15% and 10% in the China and International divisions, respectively. Moreover, Yum!’s brand recognition, consistent performance and global operations provide it an edge over competition.
 
However, stiff competition from other quick-service restaurant operators, cost escalation as well as wage inflation will keep margins under pressure in the second half of 2010. Currency fluctuation and macroeconomic factors influencing consumer spending pattern still remain concerns.
 
Accordingly, we keep our conservative view on Yum! shares and maintain a Zacks #3 Rank, which translates into a short-term Neutral recommendation. Our long-term recommendation for the stock also remains in the middle of the road at Neutral.
 
Apart from Yum!, the other stock that promises long-term growth opportunities is BJ’s Restaurants Inc. (BJRI), in which we currently have a Zacks #2 Rank, which translates into a short-term Buy recommendation. BJ’s reported better-than-expected, second-quarter earnings driven by comparable-store sales growth and higher traffic.

Read the full analyst report on “YUM”
Read the full analyst report on “BJRI”
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