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YUM: Hiccup Aids the Bull Case

YUM continues to be on our Best Ideas list as a long.


YUM released updated FY14 guidance after the close today, estimating mid-single digit full-year EPS growth, below the 9% growth the street is currently projecting.  Perhaps the more disappointing guide, however, was FY15 EPS growth of at least 10%, well below the 17% the street is currently projecting.  Specific operating unit commentary was limited, although management noted an anticipated benefit from sales leverage as sales rebound in China.

 

This release doesn’t change much, in our view, and in fact strengthens our long thesis with what is yet another example of China dragging down the overall business.  We continue to believe there is a strong likelihood management either 1) induces significant change from within or 2) is influenced by a group of influential shareholders to make significant changes. 

 

All told, tomorrow’s anticipated sell-off could present a nice buying opportunity for investors, particularly when considering expectations are being reset to reasonable and, we’d argue, easily achievable levels.  YUM is a powerful, global brand that has many levers at its disposal in order to immediately drive shareholder value. 

 

We look forward to learning more at the company’s investor meeting on Thursday.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


S&P 500: Levels Refreshed

Ed. note: This content was originally published for Hedgeye subscribers on December 09, 2014 at 11:38AM.

POSITIONS: 6 LONGS, 2 SHORTS

 

If nothing else, watching 2014 macro markets (not just SPY!) and all of the storytelling embedded within their weekly moves is a crash course in #behavioral economics.

 

That said, with both growth and inflation expectations slowing (that’s why our Best Macro Idea remains long the Long Bond), the question remains as to when they attack the SP500’s intermediate-term TREND line (like they did in October).

 

My answer? Not yet.

 

The main reason for that answer isn’t some divine survey – it’s my #process. And, across all 3 of its core risk management durations, here are the levels that matter to me most:

 

  1. Immediate-term TRADE resistance = 2065
  2. Immediate-term TRADE support = 2040
  3. Intermediate-term TREND support = 1998

 

S&P 500: Levels Refreshed - 12 09 14 SP 500 Levels Refreshed

 

In other words, as they test and try that 2040 line, I expect volatility to get immediate-term TRADE overbought. If that line holds (on a closing basis) probability rises that SPY bounces. If that line breaks, probability rises that SPY retests 1998 TREND support.

 

As I outlined in my Early Look this morning, “Bayesian Answers”, that’s my probability-weighing #process and I’m sticking to it. I only know what the market tells me – beyond that I read every #history that I can find, just to remind me what very little I know.

 

Sell green, buy red.

KM


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Cartoon of the Day: Fallen... - Oil cartoon 12.09.2014

The epic crash in oil continues with crude down over -40% since June.


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YUM: Adding Yum! Brands to Investing Ideas

Takeaway: We are adding YUM to Investing Ideas.

Note: The excerpt below was written earlier this morning by Hedgeye CEO Keith McCullough. Stay tuned for more details from our Restaurants sector head Howard Penney.

 

YUM: Adding Yum! Brands to Investing Ideas  - y7

 

In staying with the process, another Macro Exposure we want to be adding to (on down days, oversold signals, etc.) is Big Cap Liquidity (vs. Small Cap Illiquidity, in Russell 2000 #bubble terms, on the short side).

 

From a bottom-up perspective, one of our Research Team's Best Ideas (Institutional Research longs and shorts) on the LONG side right now is Howard Penney's bullish view of Yum Brands. And, from a top-down factoring perspective, the other thing I like (at a price) are consumer companies whose cost structure will be the recipient of commodity #deflation.

 

On YUM specifically, Howard thinks there are three ways you can win on the long side:

  1. The Company is vulnerable to activism
  2. Opportunity for a transformational transaction (for the better part of the past two years, management has been asked about a potential spinoff of the China business).
  3. We also believe there is an opportunity to increase leverage (to repurchase stock or pay a special dividend), cut excess SG&A, refranchise additional restaurants and command a premium valuation.

Buy red, sell green.

KM


S&P 500: Levels Refreshed

POSITIONS: 6 LONGS, 2 SHORTS

 

If nothing else, watching 2014 macro markets (not just SPY!) and all of the storytelling embedded within their weekly moves is a crash course in #behavioral economics.

 

That said, with both growth and inflation expectations slowing (that’s why our Best Macro Idea remains long the Long Bond), the question remains as to when they attack the SP500’s intermediate-term TREND line (like they did in October).

 

My answer? Not yet.

 

The main reason for that answer isn’t some divine survey – it’s my #process. And, across all 3 of its core risk management durations, here are the levels that matter to me most:

 

  1. Immediate-term TRADE resistance = 2065
  2. Immediate-term TRADE support = 2040
  3. Intermediate-term TREND support = 1998

 

S&P 500: Levels Refreshed - 12 09 14 SP 500 Levels Refreshed

 

In other words, as they test and try that 2040 line, I expect volatility to get immediate-term TRADE overbought. If that line holds (on a closing basis) probability rises that SPY bounces. If that line breaks, probability rises that SPY retests 1998 TREND support.

 

As I outlined in my Early Look this morning, “Bayesian Answers”, that’s my probability-weighing #process and I’m sticking to it. I only know what the market tells me – beyond that I read every #history that I can find, just to remind me what very little I know.

 

Sell green, buy red.

KM


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