Earnings Preview: Yum! Brands, Inc. (YUM)

Yum! Brands, Inc. (NYSE:YUM) will report quarterly earnings after tonight's close

Jul 13, 2016 at 10:50 AM
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Restaurant chain owner Yum! Brands, Inc. (NYSE:YUM) is gearing up to report earnings after the close tonight, but this morning investors are responding to news that the company will split off its China business into a new public company, Yum China Holdings Inc. The shares were last 0.2% higher at $85.93, and action in the options pits is pointing to caution ahead of this evening's results.

Specifically, YUM puts are crossing the tape at five times their expected intraday rate. The July series, which expires at the close this Friday, is particularly popular, accounting for seven of the 10 most active options. Among the most active contracts so are the July 86 and 82 puts, where it appears traders may be purchasing new bearish positions, anticipating a post-earnings slide for the shares through the end of the week.

This represents a change of pace, as call buying has been a popular strategy in YUM's options puts of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), more than 1.4 YUM calls were purchased for each put over the past 10 weeks. The preference for calls has been even more pronounced among near-term traders. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.41 indicates call open interest more than doubles put open interest among options slated to expire within three months. Moreover, this ratio sits higher than 77% of comparable readings in the past year.

Of course, today's hesitancy among traders isn't surprising considering YUM's recent earnings history. The stock has made a move to the downside in the session following its quarterly report five of the past eight quarters -- including the last four quarters in a row. While the average one-day post-earnings move over the last two years clocks in at 4.7%, options traders today are pricing in a slightly wider expected swing of 6.5%.

Outside of the options pits, YUM hasn't seen a lot of love lately. While short interest accounts for a modest 2.6% of the equity's total float, these bearish bets rose by more than 10% during the two most recent reporting periods. And the brokerage bunch has given a rather lukewarm outlook, with 10 out of 18 analysts maintaining a "hold" or "sell" recommendation.

From a technical standpoint, YUM may deserve a bit more upbeat attention than it's been getting. The shares have added 17.6% in 2016, and hit a year-to-date high of $87.40 on Tuesday. The stock has also found support at its 10-week moving average recently, but is struggling to get a foothold above the $85-$86 level, which served as support last July. Should tonight's earnings bring an upside surprise, however, analyst upgrades and more votes of confidence from traders could help the shares of Yum! Brands, Inc. (NYSE:YUM) break out of this region to seek new highs.

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