Yum Stock Is Closing In On an Important Buy Signal
Deep-fried chicken, tacos, and pizza, along with the global obsession for junk food, have propelled Yum! Brands, Inc. (NYSE:YUM) to one of the top fast food companies in the world, but there was nothing yummy about what happened on October 8 after the stock cratered to a 52-week low. While the consensus stock market advice is to sit tight, I believe there is some optimism surfacing that could see Yum stock vault higher.
Chart courtesy of www.StockCharts.com
Yum jumped four percent on Friday on news of activist investor Keith Meister of Corvex Management LP being appointed to the board. Corvex owns nearly five percent of Yum.
Now, while it’s not the same as having Carl Icahn jump on the Apple Inc. (NASDAQ:AAPL) or Freeport-McMoRan Inc. (NYSE:FRX) bandwagon, the mere mention of an activist investor coming to the boardroom can result in the rally of a stock.
Activist Investor Means Opportunity
The reality is that the appointment of Keith Meister to Yum! was probably already in the works but announced to offer the stock market some encouragement.
Consider this: Yum! is currently in discussions on what to do going forward, including its structure and especially pertaining to its China unit that generates about 57% of total sales, according to the company’s fiscal third-quarter report.
There is a feeling on the Street that Yum is serious about considering breaking up the company into two separate companies: Yum! and Yum! China. This strategic move would allow the company to separate its higher-risk China unit and allow investors to decide on which business they would rather own.
My assumption is that Yum! would simply spin off its China business and allow shareholders to decide whether or not they want to hold or sell that part of the business. China currently is unfavorable with investors, despite the fact that the country continues to be a major growth area for Yum! and I expect this to continue.
In the third quarter, Yum! reported an eight-percent jump in Chinese system sales, two-percent growth in same-store sales, and margin expansion to 19.6%. Weakness in the Pizza Hut business hurt growth.
I’m pretty confident the appointment of Keith Meister could mean a spin-off down the road should the move be seen as a way to create hidden value. For the investor, it could translate into more share appreciation from the current levels.
Of course, inaction by the company could see Yum stock sink back to the mid-$60.00 level.
Here’s the Bottom Line on Yum! Brands
In the options market, while we are not yet seeing a big surge in call buying activity, the trading is active and suggests option traders are betting on additional upside moves.
Playing the potential impact of Keith Meister on Yum! stock could be done via call options, with the next analyst meeting slated for early December, when the board could announce its new strategy to jump-start the share price.