Lioness Associates, Inc.

Economic & Corporate Risk/Yield Reports

September 23, 2012 - YUM 2012 Risk/Yield Update

Companies doing business internationally have been caught in the leadership shift in China, the Euro crisis in Europe, and the Arab spring in the Muslim world. The latest unrest in the Muslim world is likely to be a catalyst for examining restaurant locations more closely as unrest causes a restaurant in Pakistan to close  (see article)  and a YUM restaurant in Lebanon is attacked (see article).

Earlier in 2012, YUM has been challenged due to the downturn in business environment in China.  The new government in China is expected to take over sometime this fall and it is likely that they will implement measures to keep the economy "humming" and ensure that the population stays "controllable". 

But, it is also important to add that the current government is not implementing measures to control the recent protests against Japan and this is worrisome as it could spill over to protests against other countries and companies.  In addition to the protests, damage has been done to businesses of Japanese products like car dealers.  A new government coming in would likely either quell the protests or add fuel to the fire — hard to tell which path would suit their needs.

YUM's move in India could be promising but, this country is blowing hot and cold.  On one hand it wants companies and investments coming in but, it has a hard time working with these companies — as an example, what is happening with the pharmaceutical companies (see article).
 
YUM's earnings are due around October 1, 2012. It will interesting to hear what is not being said.

Note that new versions of the graphs have been provided for this write-up as the algorithm for producing the graphs has been slightly modified.

 


 



 
June 10, 2012  -- Yum Brands Risk/Yield for 2012

McDonald's reported slowing same store sales from Asia weakness and this impacted Yum Brands (see article) because investors are assuming the same issue will occur at KFC and Pizza Hut stores.

YUM's Delta Core/Transient 2012 graph does illustrate that the Core trend (black line) spends the beginning part of 2012 in the "risk" area and only moves to equilibrium in June/July 2012 and then gingerly into "yield" for the period from August to November 2012.  Some parts of YUM's graph are reflective of the dip in China's economic picture (see China 2012) in the April 2012 time frame.  China's 2012 end-of-the-year also looks better than the beginning of it's 2012 year and the same appears to be true for the YUM graph. 

The YUM Risk/Yield 2012 graph does reflect that there are predominantly "risk" factors at the beginning of the year with very little in the way of "yield" factors.  This changes halfway through the year at the June/July 2012 period and at that time is at approximately 0 -  an equilibrium point.  The term equilibrium may be deceiving in that this is not necessarily a "peaceful state" rather it is stressful state where there are equal forces on either side in a "tugging fashion".

The transient (green line in Delta Core/Transient) does have an uptick in June but, this could be reflective of "company being in the news" rather than "having good news about the company".  An example is seen in Apple 2011 graphs (see graphs) at the time of Steve Jobs passing.

Yum Brands noted back in April of 2012 (see article) that it planned to increase prices in China to offset higher food and labor costs.  In many parts of the world it is usually reasonable to assume that a company has the ability to increase consumer prices as production costs increase but, this is not the case in China (see article).  This may become apparent around the October 2012 period.  Having said that, it could be a case of "making lemonade when you get lemons" and the company could rise to the occasion.

Taco Bell of Yum Brands is also making a move to challenge Chipotle Grill with a new menu (see article) due out on July 5, 2012.  This might be similar to what McDonald's did a few years ago when it made changes to offer "good coffee" at McDonald's prices.  The key to success here may be as simple as whether this new menu will expand offerings or offer a different experience - either one might work and an analyst on this company is better positioned to tell which would be better for the company's bottom line.

One cautionary point, in 2008 Starbucks was opening more than 200 stores a year when it had to re-evaluate it's store openings at a time of economic recession in the United States.  Yum Brands might be fast approaching a similar predicament with the economies in China and India where it might need to take a "breather" - not stop, just pause for a bit.  This re-evaluation may take place around the September 2012 period and continue for a year or more.

 

       YUM Delta Core/Transient 2012 graph



       YUM Risk/Yield 2012 graph
 

Disclosure as of 6/10/2012 - Yum Brands (YUM) is not part of our portfolio at this time.